Saturday, October 29, 2011

Making A Dent In The U.S. Economic Crisis

The U.S. standard of living is declining and will continue to decline unless the country gets a handle on the budget deficit and restores growth to the job market. There are only two ways to borrow enough money to fill the deficit hole if it continues to expand at the current rate:

1) crowd other borrowers out of the market, limiting the availability of funding needed by growing enterprises, as well as local governments for construction bonds

2) Turn on the printing presses, which will lead to nasty inflation, and is simply a method of kicking the can down the road by buying some time, but will eventually lead to an economic collapse.

Making meaningful budget cuts is almost impossible with our current dysfunctional political divide. The effectiveness of organizations like the AARP in fighting rationale budget cuts makes it almost impossible to do so. Further, a single minded focus on budget cutting program by itself will not solve the problem. The U.S. economy needs more jobs, which austerity measures alone will not create.

Here is a list of things that can make a dent in the U.S economic crisis:

1) exploit the recently found abundance of natural gas in the U.S. This offers the best opportunity to ramp up the economy in a manner that can generate profits while also replacing other energy sources that are more environmentally damaging. A recent CBS report on natural gas suggested that it could add as many as 1,000,00 jobs to the U.S economy (although the source was from Chesapeake Energy - so take it with a grain of salt). Sustainable energy has cache, but simply does not provide reasonable economic returns, and worse based on current technology is not scalable yet for supplying a meaningful proportion of energy requirements. Fracking has already transformed the economy in Pennsylvania. Utilities have unused capacity for generating electricity from natural gas. Standards and monitoring ensuring that fracking does not pollute the water supply are needed. However, the goal must be to reach a balance between protecting water supplies without going overboard with overly burdensome rules and regulations.

2) Expand support for the development of sustainable energy, but with a realistic understanding that it remains an expensive source of energy. Increase spending on sustainable energy research in a search to make sustainable energy cost competitive with fossil fuels.

3) Ramp up research into thorium reactors. Some think this may be the energy solution of the future. It may be cleaner, safer, and cheaper than nuclear.

4) allow TransCanada build the Keystone XL pipeline

5) require all retailers with more than 10 locations to prominently post their percent of sales accounted for by products manufactured outside of North America

6) increase taxes on financial industry employees making more the $750,000 a year. The share of economic activity represented by financial engineering is wildly out of proportion to its contribution to the economy. The U.S. needs to direct our best and brightest young minds into science, technology, and engineering. However, it should be kept in mind that attempts to "soak the rich" are unlikely to be terribly productive and can backfire. The maxim "money goes where it is treated best" can not be ignored.

7) tax marijuana. By one estimate this could contribute $6 billion in taxes. Further, it would reduce the U.S. contribution to the drug related murders that are devastating Mexico, and also reduce the dollars flowing out of the U.S.

8) Bring U.S. troops back from Afghanistan.

9) push back the age for qualifying for social security even further and increase the retirement age for public service employees. While this will be a painful change, better a delayed pension than no pension at all

10) ban public sector employee unions from using dues for political contributions. End their use of our tax dollars to elect fiscally irresponsible legislators that continue to raise our taxes. The public sector unions are effectively buying control of votes to increase their salaries and pensions, using our tax dollars to do so. Limit the public sector unions to only making contributions from voluntarily collected contributions from their members.

11) Increase taxes on imported oil. There is terrific conflict between protecting the environment and unleashing the economic vitality of Americans. Our goal is to find a balance between the two that promotes economic growth. Cap and trade is a rube goldburg-ish substitute for the much simpler solution of increasing taxes on CO2 emitting fossil fuels. We cannot let the fear of labeling a tax as a tax to lead to an incredibly complicated new set of rules that artificially establishes winners and losers while damaging the economy. Taxing imported fossil fuels raises revenue, create incentives to reduce oil consumption, and promotes job creation for domestic energy producers.

12) Strikes offer a weapon that tilts the playing field too far in favor of labor. Further, everyone loses in the short term from a strike, including labor, stockholders, customers, and taxpayers. Arbitrators should have more authority to require workers to go back to work. However, in order not to tilt the playing field too far in favor of management, the greater of all profits or 5% or revenue generated during a period when workers are required to go back to work should be held in escrow. The allocation of the escrowed funds would be a subject for negotiation between management and labor and would be paid out after a new contract had been agreed upon.

13) The U.S. suffers from too much red tape and bureaucracy. As Jim McNerney recently stated in a Wall Street Journal editorial "the tsunami of new rules and regulations from state and federal agencies is paralyzing investment and increasing by tens of billions of dollars the compliance cost for small and large businesses". However, while the overall goal should be to reduce red tape, it should also be kept in mind that deregulation that does not take into account human avarice can leads to disastrous consequences. While there are many factors that caused the housing bubble, one of them was the overturning of Glass-Steagal legislation restricting banking activity. Also, as the BP spill in the gulf and the poor design of the Fukushima nuclear plant prove, individuals and businesses have a tendency to make surprisingly stupid decisions. Thus, while eliminating needlessly burdensome red tape should be a priority, regulations that offer significant protection should not be recklessly overturned.

14) Develop the equivalent to the personnel AMT for corporations that utilize foreign subsidiaries in tax haven as a tax avoidance strategy.

Both the Tea Party and Occupy Wall Street have identified problems with current policies. However, neither of them is focused enough on restoring vitality to the U.S. economy. There is no reason that the U.S. economy can not boom again if we unleash it from current burdens. While some of the changes required to restore growth to the U.S. economy will be wrenching, if changes are not made, we our headed for an economic calamity. U.S. voters have to choose between a doomed economy or a booming one.

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