State of the Union Address Ideas

The fiscal and economic difficulties currently being faced by the USA are decades in the making and are not the fault of Presidents Bush or Obama, though both have failed to meet the challenges and have worsened the situation.  Our problems are the result of consistent failure, beginning in the 1970's, to respond wisely to the challenges of globalization, automation, immigration, and increasing energy demands, coinciding with gradual replacement of traditional American ideals of equal opportunity, hard work, and excellence with the tempting but destructive concepts of political correctness, wealth spreading, and equal outcomes.  Here is our fiscal history for the past sixty years as I see it. All the data are from the Bureau of Economic Affairs, National Income and Product Accounts and can be found here.  Comments are mine.  Click on the chart to read the fine print.

We have been behaving as if the game is over and the only thing we have to look forward to is continued borrowing to finance false prosperity while spreading of ever-diminishing wealth, and, as a result, that is what we are experiencing. We can see evidence of all this in the thin arguments put forth in favor of or in opposition to government spending, generally focused on the trivial rather than on the significant, with little attention given to spending goals or targets and in the arguments over whether to tax more or less with little discussion of what the intended and unintended consequences are likely to be.  Such thin arguments have led to short term tinkering, attempting to compensate for current problems without any thought of systemic changes needed assure continuation of the United States as wealthy provider of assistance, world policeman, and last refuge of opportunity seekers.  (I know it may sound arrogant, but if not us, who?)

The simple fact is that workable solutions to our problems require serious and informed thinking well beyond the 24-hour news cycle, next week’s opinion poll results, and even beyond the next election. The current gap between government revenues and government spending is irresponsible and unsustainable but is still projected to continue even with suspiciously favorable assumptions about real GDP growth.

Our future depends first and foremost on a healthy growing economy that provides economic opportunity, employment opportunity, and adequate funding of essential government services.  Such an economy depends primarily on patient private investment.  And, for people and companies with money to invest, willingness to make commitments depends not on current consumer spending and other short term variables but on their assessment of the US business environment over the next 10 or 15 or 20 years.

Such potential investors are not impressed with tinkering such as suspension of payroll taxes for a short period of time, passing major tax reforms set to expire in ten years, routine bumping up against and raising the debt limit, sending Social Security recipients checks to make up for lack of cost-of-living increases, advertising SNAP (Food Stamp) benefits to encourage more applicants, promises that everybody over 65 is going to collect generous Social Security and Medicare benefits whether they need them or not or a stock market disconnected from the economy and driven by inflationary stimulus programs.  All those are phenomena which motivate concealment and conservation of assets rather than risky investing.          

Nor are such potential investors impressed with arguments that while we have a long term inability to pay for promised Social Security and Medicare benefits, we don't really need to worry about that for ten years or so when it will become really serious.  Some of the largest investments require ten years or more to even begin paying off, and serious investors want that issue dealt with now.

So, here is what we need to do to provide a predictable economic environment that will attract serious and patient investment in our economy:

1. Establish a significantly lower corporate tax rate, 15% or so, with no special treatment for any corporation.  Every corporation would pay the same low percent of earnings no matter where in the world or in what industry those earnings occur.  No special depreciation rules, depletion allowances, green energy breaks, deductions, credits, exemptions, or exclusions for any corporation.  All pay, every year, and that will mean corporate managements can focus on their businesses, quit spending billions trying to influence congress, and stop making investment decisions based on tax policy.  And Congress can quit hosting visits from and being entertained and financed by lobbyists.

2. Modify Social Security and Medicare to be means-tested safety nets, covering necessities only, to keep the elderly out of poverty rather than providing benefits for everybody, whether needed or not, and assure that the tax rates are adequate to fund expected payouts. Forget the so-called "trust funds" and recognize that these benefits operate on a cash basis.  

3. Reform personal income taxes to eliminate all deductions, exclusions, exemptions, and credits and significantly reduce the marginal rates such that income tax revenue from current earnings will be increased or remain at current levels but the penalty on future and additional earnings will be much lower.  Eliminate the temptation for individuals to make personal decisions based on tax policy.  Get the IRS out of our personal lives.

4. Keep Medicaid available for the poor with a nation-wide network of medical clinics, but free the rest of the health care industry to operate on a competitive basis and without interference from the government.  Let everybody pay for their own routine health care while assuring major medical insurance availability for all who want it with an assigned risk system such as is available for automobile insurance.

5. Provide all the basic necessities, including health care, for the mentally and physically disabled but provide only employment opportunities for others in poverty.  

6. Cease federal funding of state and local programs.  Let the states compete with each other for jobs and tax paying companies and citizens and let the federal government handle only national issues.

And what would be the result of all that?  A reasonable chance at 4% or more long term real growth in GDP which is what will be required to get the national debt back down to a reasonable percentage of GDP without destructive inflation.

Hopefully the president will suggest something similar to the above in tonight's State of the Union Address, but I'm not holding my breath.

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