Is it hard to make arrangements with yourself, when you’re old enough to repay but young enough to sell? Tell me why, tell me why … tell me why. So concludes the opening track on Neil Young’s album After the Gold Rush. Written by Young in 1970. This lyric is about time and seems to have some meaning as we face yet another election where seemingly little discussion about long term debts (old enough to pay) and huge problems facing the country’s young people.
Once again, the American people are asked to take their valuable time to vote in an election where the candidates, be they for Congress, local government and even the President, are in reality just more of the same. In fact, the American electoral system has been so completely taken over by the political machines that even the “outsider,” Donald Trump, is proposing economic policies that are rehashed from the Republican Party playbook. In the end, neither Presidential candidate is proposing anything that will either make it through a Congress that is completely controlled by the political establishment, or will do much to help the American economy.
The bottom line is that the economy is not set for growth, and a massive tax increase like that proposed by Secretary Clinton will make matters much worse, and massive deficit spending like that proposed by Mr. Trump is simply a continuation of the very policies that got the country into this mess.
It’s sad, because in many ways Mr. Trump is correct in suggesting that something is truly broken in America. The economy is not growing, and based on the way that the Bureau of Economic Analysis measures GDP, the only growth is really due to government debt and higher costs for health care – obviously something that one does not want their economy built upon. Federal debt is reaching crisis proportions, and the borrowing has not been invested but rather simply consumed. As the Democrat Party candidate, Secretary Hillary Clinton, has pointed out, government has not been investing in infrastructure, education, or many of the things that lead to future economic growth. On top of all of this, the promises that governments have made to employees, seniors, and bond holders add untold billions to the real deficit.
So what to do? How can government policy be reformed to help get the country out of the mess that it is in? In my humble opinion, there are five distinct policy changes that should be undertaken. All of them are designed to do two things – increase the productivity of American business and workers, and encourage investment in productive assets rather than in wasteful consumption. So here goes:
1-Reform the Federal tax code:
The American tax code is (in the words of Mr. Trump) a disaster. Tax rates, tax breaks and tax penalties are not designed to work together, the code is grossly unfair both vertically and horizontally, and it is designed to discourage productive economic activity. At a minimum, the Federal government should institute four general reforms to the tax code, all of which will help lead to more investment in productive activities.
First, the government should eliminate taxes designed to encourage or discourage specific social behaviors. If the government thinks people should not drink, or hunt or smoke cigars, then pass regulations through a legitimate rulemaking process, don’t pass taxes that encourage uneconomic economic behaviors.
Second, don’t pretend that all taxes are not paid by workers and consumers. The federal corporate income tax should be completely eliminated. This tax does not bring in much revenue and is massively distorting. Tax inversions would not occur, and in the end any savings would be passed through to workers, investors and consumers.
Third, stop discriminating against work. Income is income is income, no matter if it is earned by sweating, investing or renting. All income should be taxed at the same rate no matter what the source. Dividends, carried interest and other income received mainly by the wealthy should be taxed at the same rates as similar levels of income earned by working people.
Fourth, greatly simplify the tax code. There is no reason why even middle class people need to spend $1000 for an accountant to figure out what they owe. Deductions and credits should be cut to the bare minimum. I would suggest that the deduction for charitable contributions, and medical expenses, as well as the earned income tax credit are probably the only provisions worth keeping.
2-Insist that Congress live up to its responsibilities:
I remember listening to a speech by a supposedly libertarian leaning Senator where he laid down fire and brimstone over the “out of control” Federal regulatory agencies. You know, the alphabet soup of rule-making bodies like the FDA, OSHA, EPA, FTC, etc. All I could think was that the sole reason why these agencies are out of control (and they are) is that Congress forfeited its responsibility to voters and gave thee agencies carte blanche to do what they wanted. Federal regulations are costing about $2 trillion per year in compliance costs and while many are good and beneficial, I would argue that most are not what they are cracked up to be.
Congress created this mess and Congress can eliminate it by simply taking back authority to set laws and rules. It is a lot harder to pass a stupid rule through Congress than it is through an agency specifically designed to create new rules.
In addition, Congress should use its oversight and funding powers to defund and to overturn stupid and uneconomic rules and regulations. Even eliminating just 10 percent of the cost of useless rules would save business $200 billion per year – money that can be used to lower prices, invest in new factories and offices and to give workers raises.
Finally, as politicians like to say, Congress has the “power of the purse.” Back when the Constitution was written it was important that decisions about government spending not be made by a President or a King, but rather by the representatives of the people. This is why the House of Representatives has overwhelming authority over the nation’s budget. Unfortunately, for the past 8 years Congress has not actually passed a budget according to its own rules. Whenever a Republican (or for that matter a Democrat) legislator complains about out of control federal spending they have only themselves to blame. In fact, according to the rules of the Congress we should have shut the government down in 2009 and gone home, so for Pete’s sake, get to work and take responsibility for the budget.
Oh, and I will not even mention that only Congress has the power to declare war. Funny how it has not done so since December of 1941.
3-Reform trade policies to encourage both imports and exports:
Trade is the current boogeyman in the Presidential race, and it is likely true that the Chinese government has been able to use its control over the economic system in that country to take advantage of World Trade Organization rules and to dump commodities on the world market. This has harmed businesses throughout the world, not just in America. But as economists since Adam Smith have shown, fair and free trade is beneficial to economies, to consumers and to workers.
I only have to look as far back as to when I was a kid, and we could only get oranges during two or three months a year, and bananas were super expensive. Today, due to the miracle of trade people can purchase almost any fresh fruit or vegetable any time of the year, and prices have plummeted. Trade benefits everyone, and it is the responsibility of the Federal government to ensure that everyone abides by the rules – not to simply shut off the spigot.
4-Stop distorting markets:
Government’s most important role it to ensure that every citizen (and every business) has a fair and even playing field to operate on. It is not government’s job to pick winners and losers. This is a road to serfdom (as the economist Friedrich von Hayek might have said). Take energy policy. Over the past eight years, the Administration has done everything possible to harass and degrade the fossil fuel industry in this country, while at the same time dumping wasteful subsidies on favored producers of so-called “sustainable” energy sources. This has led to massive inefficiencies in the American energy market, and has cost consumers and taxpayers billions upon billions of dollars.
Other industries that certain activist groups find to be unsavory from firearms producers, to tobacco manufacturers, to food manufacturers have also seen competitors subsidized while they were subjected to regulations, and higher taxes.
And I won’t even go into the overall destruction of the medical care system brought about by Obamacare.
Markets are best at deciding winners and losers, and the government should only step in when wrongdoing or obvious market failures (for example monopolies) occur
5-Be honest about so-called entitlements:
Finally, there is the so-called third rail of politics. The entitlement mess. The Federal government promise its workers super-huge pensions, promises the elderly retirement benefits and medical care, promises to back home loans when people default, and promises to take care of the poor, the downtrodden and the disabled. Promises that are simply not funded.
The liabilities that led to the bankruptcy of Detroit or of Puerto Rico are nothing compared to the unfunded liabilities of the Federal government. These obligations will not be met, and its about time that the political establishment come clean and allow people to start saving for themselves.
Let’s be honest. Accomplishing these five goals is politically difficult, but if the American economy is ever going to increase productivity to the levels that are necessary to start growing the economy again, enough to Make American Great Again, then the next Administration needs to at least start moving towards enacting these policies. Tell me Why this cannot be done.