November 19, 2008

21st Century Part II - The Economy and Government

With the economy on the precipice of a potentially deep and damaging recession, Americans were rightly focused on it as the primary factor in this year’s election. Any positions on social policy, military policy, poverty, environment, Wall Street bailouts, education, immigration, or 1st or 2nd amendment rights are meaningless; unless they are backed up by a strong, vibrant and growing American economy. Without a sound financial basis to build upon, there would be no military; there would be no ability to educate, and all of these other issues become irrelevant.

Regardless of party affiliation, every American can agree that a sound economy is an imperative, and that soundness must fulfill everyone’s definition of what ‘sound’ is. That means America needs an economy that works for every American, not just Wall Street bankers or corporate executives enjoying multi-million dollar bonuses. It has to work for the assembly line worker, and the child care provider and the small business owner too.

There are some basic principles that seemed to have just slipped away. I’m not talking about just at a Congressional or Executive level. I’m also talking about board rooms and lunch rooms. Things like respectful dialogue in civil discourse, or an honest day’s work for an honest day’s pay. As a nation America needs to get back to these things. There needs to be a vision for how to save America from its growing bad habits. We need to fix certain things at a governmental level. But that is just a starting point. President Kennedy said “Ask not what your country can do for you, but what you can do for your country.” I believe the implied notion is that if you dedicate yourself to improving America, if everyone does, then all will all benefit from that improvement individually.

In order to overcome the challenges facing the nation, a dedication from each and every American to participate in lifting this great country up – back to where it belongs. To be as President Reagan put it, that “shining city on a hill.” Regardless of who is in charge, the paramount challenge will be righting the ship. This will provide a foundation for re-visiting all of the other issues that America faces or disagrees upon. Turning the economic engine back to full power will be the focus of the next decade, beyond the next presidency.

Tackling the nation’s financial woes boils down to two areas of concern; how much debt The United States has as a nation, and the balance of trade, in other words, how much more is spent on things from other countries than they spend on things from the United States. This second item is particularly bad because it means the U.S. borrows money from foreign sources and end up owing billions of dollars to external entities beyond its control. The United States is mortgaging its future and risking its national security in a non-military sense.

People argue in favor or against free trade about free trade. I believe free trade is a good thing if it is done fairly. But the world is not always a fair place and national priorities must reflect that reality and not the pipe-dream of a perfect world. Free trade can only work on a level playing field. While no one can control the decisions and actions of another nation, things can be done to ensure that the playing field is as level as possible.

How? We must address specific items.


Budget – The national debt is both easy to understand and hard to understand. Easy in the sense that everyone gets that every year the federal government typically spends more than it collects. It’s hard to understand the enormity of what is owed in total. With this current bailout the national debt ceiling has been raised to over 11 trillion dollars. That amount is staggering. The government belongs to the people. So every man woman and child in the nation will in a sense, owe approximately $36,000. And the number will continue to rise, daily. This is in addition to any individual debts or mortgage obligations you may have.

Every year the amount the government owes goes up. And every year the nation falls deeper into to debt (and also transfers more national wealth outside our borders). It is simply unsustainable. Let me repeat that – it is unsustainable. The republic will not go on indefinitely on credit. The time to pay the piper will come.

Short of a balanced budget amendment, the natural inclination of the Congress is to tax and spend. And overspend. But Constitutional amendments aren’t realistic in today’s day and age. So how can we fix things and prevent an economic meltdown?

You have to ask yourself, for the amount of government services I am getting, is it really worth all of that debt? Chance are your answer is no. We absolutely must reign in spending. And it is not enough to fight earmarks and pork-barrel spending. The government must reign in spending in an even and tempered manner. Working with the CBO to fight waste and with the Congress to identify areas where restraint is feasible in a bi-partisan manner. All of this must be done with an objective of balancing the budget within one presidential term and setting a target of paying off the entire national debt within 30 years. This will require bi-partisan commitment and sacrifices on both sides of the aisle. But similar to the emergency response measures being espoused today, we must come to an agreement that tightens our belts collectively and without partisan rancor. The President should not support any budget that does not work towards these goals, and be clear and direct in his reasons for opposing any budget that he deems inadequate in this regard.

This approach must apply to both discretionary and non-discretionary spending. Compromises will need to be made, details will need to be worked out, and it will be tough. It will be tough to negotiate and even tougher to transition afterwards. But the alternative of punting the issue down the road again would be catastrophic. Too long we have stuck our head in the sand and pretended the looming economic crisis and unfunded liabilities are not heading our way like a transport truck in the middle of the highway. The time to act has drawn to a perilously limited window. Further delays in action will only deepen the pain. And I hasten to add that it is a pain that will dwarf the current banking and automotive crisis in scope.

There is another deficit that is more immediate and being more keenly felt by today’s American families. That is our balance of trade. The balance of trade is not the root of the problem. It is rather a symptom resulting from other factors facing the nation. I will address these issues individually and discuss possible solutions for each area.

Balance of Trade

Outsourcing: On the surface of it, outsourcing looks like a no-brainer for a corporation. Why pay someone in America $16 per hour if you can pay someone in a developing country $2 per day for the same job? Never mind the quality of the work, the public safety and product recalls. If you sell the product for $30 you make much more profit. Capitalism is based on profit, and more is better. But capitalism is NOT based on greed. At times greed can provide motivation but unfettered greed has proven disastrous. Jobs are shipped oversees and our manufacturing industry is slowly drying up. This same type of problem occurred in England in the 1700’s.

So how do we fix it? The only way to fix the problem of outsourcing is to make producing in America more economically viable. And since no one wants to lower the minimum wage to $2 per day there’s really only a couple of options left.

A Manufacturing Tax Credit to companies who sell manufactured products ONLY if they are manufactured in the United States. As John McCain pointed out, Ireland has a corporate tax rate of 11%, drastically lower than America’s. What I suggest is a two tier tax system. Let’s lower our tax rates for any company that produces 100% of its finished products in our country to 3%. Any company that outsources its production or support services (like call centers) gets taxed at today’s current rate of 20%+. What an incentive to build here in America!

This will help bring back manufacturing jobs, and with it stronger employment and have spin-off benefits like a larger tax base and with more and better employment, potentially downstream benefits like lower crime rates too.

Tax Code: As I mentioned we need to adjust the tax code to a two tier system. But there are other things we can do. We can provide a deeper Research and Development Tax credit. America has been known for innovation. We must ensure that in the 21st century, this does not become a matter of nostalgia. Let’s double the R&D tax credit for companies that qualify for the 3% tax rate. Let’s remove barriers to producing new developments so far as they do not impact product safety. This R&D credit is what can be leveraged to move our economy towards greener technology. Bill Clinton’s war room used to use the phrase “It’s the economy stupid.” Well guess what, in this case, it’s the carrot stupid, not the stick. Give people reasons to WANT to invest in new a smarter technology that is better and faster and greener.

Let’s simplify the effort involved for both small businesses and large corporations in filing and complying with a tax policy that is the size of a phone book. Is that really necessary? McCain talked about earmarks, but the same basic principle applies to tax laws. Every time someone gets an idea in their head to do something using the tax law, the size of the tax ‘phone book’ gets bigger and bigger. No one ever thinks to streamline it. I’m sure if someone went through it (probably a team of ‘someones’) with a fine-tooth comb they would find discrepancies within the laws themselves. The comb probably wouldn’t even need to have that fine-tooth quality.

And one further step needs to be taken – let’s think about a National Sales tax in the context of free trade. Right now a country selling products in the US, under free trade – with minimal or no tariffs or import duties gets away with collecting profit on sales in the United States, without any recompense to America. If we put a National Sales tax of 3% on all sales, of goods, then not only would our own companies contribute more to America’s tax base but so would foreign competitors. The argument that these costs would be passed on to consumers may prove true, but there are counterpoints in the benefits of increasing taxes equitably (between the rich and poor, and between foreign and domestic companies).

Finally, let’s consider significant incentives for taxpayers to save. People are spending beyond their limit and manufacturing below its limit. The U.S. is an indebted nation at all levels. When like drunken sailors and producing less and less, the U.S. is simply sending wealth overseas. Let’s create additional incentives on our 401k programs in order to ensure that Americans are saving for the future. This may sound like another old-fashioned idea, but the reality is that you can go back ancient Greece and Aesop’s fables to find examples of this being a truism. Money saved today is an investment in our future. If we forget this truth, we are dooming our future to more and more examples of stock market crashes, and massive business failures with frightening fallout.

Immigration Law: Enforcement first. That has not changed. Think about what we are facing this century. Our next big focus will be on the re-emergence of China as an economic superpower. Three things are needed to drive an economy – land, labor and capital. China has natural resources, and land. They have a massive population base and they are rapidly developing the capital they need to be the dominant economy of the 21st century. That is not a position America should blandly forgo. In a unique position, having the land, the resources and the population needed to compete, the United States must strive to maintain what it needs to compete.

Look at America during it’s periods of economic expansion and compare it to the population growth. America needs to grow in population, but needs to do it in a smart way. How can it achieve this? No one wants a free-for-all in immigration, but immigration IS part of the solution.

We need to provide natural (i.e. domestic) population growth. And we need to ensure that there is a LEGAL path to citizenship for people who want to come to the United States and build a better future for themselves and their family. But it must be for those who do so through legal means. This means stricter enforcement for companies in who they are able to hire. It means protecting the borders. And it also means revisiting the immigration laws to make the path to citizenship simpler and easier for those who qualify by bringing marketable and needed skills to America. It is important to ensure that the path not only to citizenship but to integration into American society is smooth. And finally, someone needs to revisit the assumptions about how many immigrants are needed. Do we need more? Do we need less? The answer is probably a little of both. Certainly we need less illegal immigrants, but depending on skills, we need more of certain types and less of others.

On the flip side, America cannot afford to naturalize citizens who become a drain on the system through inactivity or illegal activity. We are at an economic crossroads and adding to our economic burden is simply not an option. So we must provide incentives for natural growth and legal immigration that align with the economic reality of the day.

Currency Valuation and Trade Policy: Let me go back to free trade for a minute. Free trade does assume a level playing field in order to be beneficial to all parties concerned. A level playing field means free and fair access to each others’ markets. And it means similar economic conditions in each country.

Many trade partners compete fairly, and provide products or resource cheaper than can be produced domestically. Conversely Americans provide them with similar resources or products.

But some countries limit access to their markets. Other countries, such as China, peg their currency to a level relative to the American dollar. By under-valuing their currency, they can give themselves an unfair trade advantage and take advantage of American willingness to trade and our willingness to spend. For countries that try to manipulate the system, the penalties should be prohibitive. If you want access to the US market, you have to play by fair international rules. If you don’t play by the rules, you get no access. What’s the point in providing consumers access to $1 shirts made in Asia, when all the manufacturing jobs are shipped overseas and nobody can afford that dollar?

How do we manage something like this? Not with a bloated bureaucracy. What is needed is an expert panel that can implement rapid response changes to how we deal with other nations financially. We need to put simple principles in place that allows for quick changes in a rapidly changing economic environment.

Education: Schools are producing too many lawyers in America and not enough Engineers, Doctors and IT experts. Expertise is outsourced in part because there isn’t enough domestic supply. You can’t compete well in industries like the automotive industry or the electronics industry when you can’t productionize your innovations well enough. More engineers can accomplish this. Some thought should be given to revisit how business degrees focus on accounting and marketing and finance and very little on production.

There needs to be a re-think on what is being emphasized in education. In order to orient development, obviously this is a long term process, there will need to be no set quotas but again use the carrot approach instead of the stick.

Let’s look at industrial college partnerships. The way the GI Bill encourages enlistment for education, let’s get partnerships between education and industry (not business, industry) to produce subject matter experts for what the industry needs. Offer a sponsored education in exchange for a three year work term upon graduation (at a reduced salary range until the expiry of the term). The company supports a number of full scholarships relative to its expected needs; the college educates a student according to those needs, the student graduates and gives a three year guaranteed work commitment to his or her sponsor. In exchange for a free education, the student would work for a reduced pay for three years.

From the companies perspective the government could provide a tax incentive relative to the amount of the scholarship up to a maximum threshold to offset the cost of the sponsorship. The only caveat would be that a high percentage of the scholarships must be related to production, and less to other business aspects such as finance or marketing.

Corporate Regulation: Corporations act in an environment of minimal government involvement beyond current regulation. Blindly applying more regulation is not the answer. However, companies need to look beyond the next quarter’s results. Our short term, myopic view of profit has hurt the country’s economy. You see it in the off-shoring of jobs. You see it in the questionable methods of generating more profits – methods that led to the bubble and the sub-prime loan crisis. You see it in the fire-sale atmosphere of foreign takeovers of once proud industrial, commercial and financial giants.

How do we correct the thinking that leads to this? How do you overcome greed and fraud and the get-rich-quick mentality? Strictly speaking, you can’t. Human nature is what it is. The desire to do well is not a bad thing, but the desire to do well at any cost is inherently short-sighted and dangerous.

The only real way to overcome these things is to ensure that sufficient safeguards are in place – accountability and transparency. Ensure that corporations are held accountable for their own questionable behavior. Ensure that risky behavior is not subsidized by bailouts. Ensure that risky behavior is recognized as such before it has time to grow and spread. And ensure that those responsible are not allowed to walk away on the taxpayers’ dime but face the consequences of their actions head on.

This can be done through clear, concise and appropriate business regulatory requirements. Not overly cumbersome regulation, but appropriate regulation: Regulation and responses that are not made in haste but are made with the appropriate forethought and anticipatory of future requirements.

Citizenry: Finally all of this requires a rededication to core American principles on everyone’s part. Hard work, innovation and dedication to country are all virtues. They all provide their own rewards. Think about how you apply them in your day-to-day life. Are there things you could be doing differently? Ask yourself “How am I, investing in America?” Do you buy American or does it matter to you? It’s not always, all about individual choice. Sometimes your right choice is to make the less selfish choice. Do you save for your future or are you borrowing against the future of your children and theirs? Do you care about your neighbors or only yourself? Do you work hard or work indifferently? Individual actions, just like voting, add up to a greater whole than the sum of the parts.

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