HOW Can We Improve our Nation’s Economy?

The American Vision

Very recently, I saw a query by a friend on Facebook who asked, “What is your vision for our country?”.  This friend then made a statement of her vision which was quite nice.  It included things like “adequate employment for everyone”, “high quality education”, “respect for authority”, and “healthy communities”.

Who could argue against wanting any of these things?  What a great vision for our country.  Where conflict arises is in HOW we achieve this vision.  And, the HOW is where the political discussion ought to take place.

I am writing a weekly blog on each topic in this ‘vision’ statement to tell you where Democrats stand, where Republicans stand, and where I stand.  I started with EDUCATION in my last post; and will talk about our ECONOMY in this one.

Photo by Government of Alberta

Photo by Government of Alberta

The American Economy

When most people think of the economy, they think of their personal financial opportunities.  Depending on who you are, you may be interested in different aspects of the economy.  Most politicians seem to focus on job-creation as their number one idea in political speeches, so that is the aspect of the economy I’d like to focus on in this blog post.

Economic Viewpoints

There are a few different views on how our economy works.  I will attempt to simplify these views for the purpose of brevity.

Free-Market Capitalism

Free-Market Capitalism is a theory that has been touted by a popular author in the 18th Century named Adam Smith.  Smith wrote a book called Wealth of Nations that claimed that an economy could operate on its own and serve everyone in the community well by a force called the ‘invisible hand’.  The notion that companies would provide services that consumers needed at a fair price based on an open and free market to purchase those services.  Smith did not advocate a market without government regulations and controls, but did imply that the less government involvement, the better the free-market will work.  In Smith’s free-market, consumers would get quality products at a reasonable price, innovators would be rewarded for their creativity, and capitalists would be rewarded for the use of their money.

Keynesian Economics

Keynes was an economist born out of the Great Depression.  He believed that government could stimulate the economy by injecting money into the economy, thereby increasing economic demand.  If demand increased, then supply would have to increase.  If supply increases, then people are put to work to provide that supply.  Ironically, most demand-based government economic stimulation was not put in place until after the U.S. had almost completely recovered from the Great Depression.  However, Keynesian Economics has been a popular economic stimulant since the Great Depression and was used most recently in a $800 Billion stimulus package that was approved in 2009 to get the U.S. out of the Great Recession that took place in 2008.

Supply-Side Economics

Supply-Side Economics is also termed ‘trickle down theory’ coined by President Reagan in the 1980’s.  The theory is that if you cut taxes to the producers in the U.S., they will have more funds available to hire workers and this increased supply in private sector funds will stimulate job growth in the private sector.  Suppliers of goods and services will grow and thus their workforce will grow.

Modern Money Theory

Modern Money Theory or MMT is the idea that government spending creates private sector surplus.  The idea is that money is created by government spending and so the higher government spending, the more money creation, the higher private sector surpluses and the more robust the economy.  Many proponents of MMT also advocate a job guarantee whereby the government will provide jobs to anyone who is out of work.  While many are concerned about deficit spending and the national debt, MMTer’s believe that debt and deficits are of no concern.  MMTer’s also advocate extremely low interest rates and low income taxes.  The rationale of MMT believers is that our sovereign money supply is infinite and should not be artificially limited by gold-standards, debt limitations or poorly thought-out government controls that do nothing to help our economy.

The Political Landscape on Economics

The Democratic Party

Democrats subscribe to a combination of MMT (except for the low-tax argument); and Keynesian theory of economics.  Ironically, Democrats agree with Republicans on more disciplined economic spending.  However, Democrats believe that cuts should be made in Military spending as a general rule; and would like more funds moved to domestic investments that prop up the poor and middle class in the U.S.  Democrats also often want increased taxes on wealthy citizens in the U.S.

The Republican Party

Republicans claim to ally themselves with Adam Smith’s invisible hand ideal.  However, in practice, Republicans tend to grow government just as much or more than Democrats.  Republicans tend to favor increased military spending, low income taxes, and advocate Supply-Side Economics.

My View

There are bits and pieces of truth in all economic views.  Oddly, there is no one economic view that has been fully tested.  Most Democratic societies include a combination of all economic theories because politicians have advocated for a variety of approaches to making their economies work the best.

I believe that a compromise between all economic theories is actually the best approach for a robust economy.  I side with Republican Party on favoring less government intrusion on our economy, but side with the Democratic Party on economic priorities.  Even though I would like less government involvement, I do believe our economy requires public sector engagement in select facets of our economy.

Our government spending has grown from less than 10% at the start of 1900 to a height of 40% in our current day.  This means that 40% of all spending in the U.S. is done by a government agency.  Approximately 50% of government spending is done by the federal government while the other half is spent by local governmental entities.  I believe that our economy has done its best when total government spending is near 25%.  This essentially means that our economy would be 25% socialistic; and 75% capitalistic.

Government’s Role

I believe that government needs to be involved in policing, fire protection, court systems, law making, and general governing.  These are core functions the government must provide in any civil society.  I further believe the government ought to provide infrastructure for transportation including roads, airports, bus terminals and the like.  I am ALMOST convinced the government should provide healthcare, utilities and education.  However, I am convinced that our current systems need major overhauls in their cost structures before these functions can be cost-effectively managed in a public system.

Education

We have demonstrated that public operations of our school systems is not working well.  We pay more than most developed countries and we have mediocre results in our public education institutions.  This is not a good value for the public investment or students who rely on these institutions for higher learning.  I think public education needs to refocus on their core purpose of preparing Americans for the workforce; and dump academic programs that do not accomplish this purpose.

Healthcare

The U.S. pays double what the second highest country’s citizens pay for healthcare.  Insurance companies created the first distortion in our healthcare economy.  We then overlaid the Affordable Care Act (Obamacare) on top of this grossly cost inefficient system to create a healthcare behemoth that needs major changes to actually become affordable for most middle class Americans.  Currently, poor people get free healthcare, wealthy people can afford a medical catastrophe without health insurance, and middle class citizens are paying outrageous health insurance premiums with very little benefit.  This is not a working system.

Utilities

Utilities are a toss up.  We have some public utilities and several privately owned utilities in the U.S.  In most states we have decided to allow one utility monopoly to serve its constituents with oversight by government regulators.  A few states have allowed multiple utilities to compete for consumers and have reduced energy rates to some extent.

Education, Utilities and Healthcare were clearly government programs that were not considered in our country’s constitution along with several other government programs that have grown our government to its current size.  While a case can be made for the government to run these features of our economy, we need to be much more diligent to require accountability for the value we receive from these government services, because there is no invisible hand to ensure we get value for our public investment in such services.

Military Spending

We have a substantially higher military spending budget than all developed countries in the world.  For those who are proponents of high military spending, they believe we need to control what is going on in the rest of the world, or we will have a much bigger battle on our own soil later.  In economic terms, military spending is probably the least beneficial spending our country can engage in.  If you think about investing in sophisticated aircraft, tanks, and bombs to destroy other economic assets, all we do with military spending is create monstrous debt and kill people.  I do believe we need to defend our country, but I do not believe we need to pay for the defense of every other country on this earth.

While we currently spend close to $700 Billion per year in military spending, I believe we can cut this expense to $250 Billion per year and pull out of all foreign military entanglements.

Welfare

We have created a disincentive to work which has distorted our free-market economy.  President Clinton passed welfare reform in 1996 which required welfare recipients to work and would only allow welfare to be paid for a limited time.  This act sent many welfare recipients back into the workforce who either abandoned welfare altogether; or supplemented welfare checks with their own money.  Unfortunately, this law has been ignored by President’s Bush and Obama and has been increased to levels not previously seen prior to the Clinton’s administration.

Our current welfare system has encouraged single mothers to avoid marriage; has discouraged able-bodied people from work; and has trapped many citizens in perpetual poverty.  We have to return to the reform that had done so much for our economy and the self-sufficiency of so many.

Free Trade

In order for a global free-market to operate effectively, we cannot impose irrational import or export taxes on goods either leaving or entering the U.S.  Most proponents of free-trade have advocated dropping import taxes on goods coming into the U.S. in exchange for foreign countries eliminating their import taxes on goods coming to them.

That all sounds great on paper.  Unfortunately, the free-trade systems that are intended are not working that well for our middle class citizens.  The U.S. has passed the North America Free Trade Agreement (NAFTA) in 1994.  Since that time, we have seen trade gaps widen in trade with Mexico.  A Mexican trade gap means that Mexico is exporting more stuff to the U.S. than the U.S. is exporting to Mexico.

NAFTA Mexican Trade Gap

A trade gap doesn’t automatically mean bad things for the U.S.  In fact, after 1994, unemployment fell from 7% to 4%.  However, if you remember, in the U.S. we were increasing investment in internet companies and divesting ourselves of manufacturing in the late 1990’s.  After the internet bubble burst; followed by a housing bubble crash in 2008; the U.S. unemployment rates have remained relatively high.

Unemployment Trends

It is my contention that our economy is still reeling from NAFTA.  We did not realize the job losses in the 1990’s because they were displaced by an artificial internet economy.  We did not realize job losses in the early 2000’s because they were displaced by an artificially stimulated construction economy.  After both of these bubbles have burst, it is evident that we have given up far more than we wanted to with the NAFTA agreement.

Here are the changes that happen in a free-trade agreement:

  1. Manufacturing employers experience a reduction in labor costs and regulatory costs by doing business overseas.
  2. Manufacturer profits remain strong or increase due to reduced costs.
  3. Skilled, blue-collar workers lose employment.
  4. Distributors, sales and retailers increase employment due to increased domestic sales of low-cost goods.
  5. Investors increase income while middle class workers lose income.
  6. Consumers reduce expenses from low-cost imports.

NAFTA vs Income Inequality

Although middle-class incomes have risen somewhat since NAFTA, they have recently flattened or declined in the last decade (2004-2014).

I want to be clear.  I am not against free-trade per se.  I believe that, in a global economy, we will lose labor to foreign countries as a normal extension of a free-market economy.  However, I do believe that the U.S. government needs to give domestic manufacturers a break when it comes to regulatory and income tax burdens that such companies do not experience in foreign countries.  It is bad enough that domestic workers have to compete with foreign low-paid workers, why do we make the case even more dire by making it hard for domestic companies to locate in the U.S. with regulations and high corporate taxes?

Taxes

Most countries who have added multiple social services to their government role, have also created a relatively ‘flat’ tax system. Most poor people below a certain income level pay no taxes; and everyone above that level pays the same tax rate.  If we create a government that has a spending rate of 25% of our GDP, then that tax rate should be 25%.  This rate is not a federal income tax level but includes all taxes paid including local property, sales and income taxes.  Special tax deductions should go away altogether.

Taxes and loopholes have been used by politicians to manipulate people… and it needs to stop.

Debt

I briefly described the Modern Money Theory (MMT) ideal above.  They advocate increased debt to provide unlimited economic growth.  While I subscribe to most of their doctrine, I believe we need to limit our debt to a reasonable level of no more than 50% of our Gross Domestic Product (GDP).  Our current federal debt (2016) is 100% of our GDP.  I have picked this arbitrary number because I believe there are three problems with excessive debt:

  1. High interest costs that rob our budget of other priorities.
  2. Frivolous spending in government agencies that doesn’t contribute value to tax-payers.
  3. Devaluation of U.S. Currency and risk of inflation.

I do not believe debt should be used for operating budgets, but do believe debt is appropriate to invest in assets that will last longer than the term of the debt that is to be paid off.

Repayment of Debt

You will hear politicians on the right and left argue that by increasing our debt, we are obligating future generations to pay off this debt.  Although this statement is true in the fact that future generations may have higher interest payments on this debt, it is not true that future generations will actually pay off this debt.

Contrary to many Modern Money Theorists, our Federal Debt is REAL debt.  The U.S. Treasury sells treasury bills to bond holders who are the official creditors of the U.S. Government.  We pay real interest on this debt.  And although we can never really default on this debt, high levels of debt will result in high interest costs and may devalue our currency to the point that purchases from foreign countries will be quite expensive.  The good news is that most other developed countries are doing such a poor job of currency valuation, that the U.S. is still in pretty good shape.

Jobs, Jobs, Jobs

You hear it from both sides.  Every politicians says they can create jobs.  How can a politician create jobs?  They can’t.  Job creation is a by-product of a healthy and free-market economy.  Politicians cannot create jobs.  In fact, when politicians try to create jobs, they distort the free-market economy and often destroy the natural job-creation of the free-market.  The best a politician can do is:

  • maintain a consistent easy tax system;
  • limit the role of government to what is outlined in the constitution;
  • create disciplined economic systems within government agencies;
  • create and enforce reasonable regulations.

Banking

Our banking system is a literal MESS.  We have fiat currency that can be created one of two ways: 1) government spending; or 2) debt.  Our banks have a system that allows them to receive free money from our government which they then loan to consumers who pay interest on loans.  Ironically, the government also pays interest on their debt as well.  Bankers then make profit on money that belongs to its depositors and money they get for free from the government.  On top of all of this, these private bankers collude to keep interest rates they pay to their depositors low while keeping lending rates high.

If this is the system we have decided to use for our currency, we really have no need for a private sector banker.  Unfortunately, bankers continue to pump money into political campaigns to keep their sweetheart deals.  This needs to stop!

The Gold Standard

There are many people who believe we could restore order to our banking system if we went back to the Gold Standard.  I want to quickly talk about what the Gold Standard is and when we abandoned it.

In the U.S., like other countries, we initially had gold and silver currency.  Since gold was rare, it was thought that would limit amount of coins or money available and so it was used as a standard in trade.  Even though more gold was being discovered, the amount of added gold in the U.S. and other economies was relatively limited and so as long as the total amount of gold kept pace with economic growth, it seemed to be a good standard for currency.  In the mid 1800’s, other coins and paper bills had been produced by state or federal governments to use in lieu of gold.

In 1913, through the formation of the Federal Reserve, the U.S. decided to attempt to control the value of their currency and finance banks through a central bank to avoid bank crashes experienced in earlier decades.  World War I happened and the government had to spend more money then they had available based on the gold standard, so they ignored this standard during the war.  Because of inflationary concerns, they returned to a gold standard after the war.  For a variety of reasons, during the Great Depression, the U.S. decided to change the way the valued their currency.  The U.S. created a modified gold standard that basically locked the value of gold at $35 per ounce.  Since gold was selling for $20 per ounce in those days, $35 per ounce was quite a bargain, if you had gold. In the 1970’s, the U.S. decided to abandoned the $35 per ounce fixed price and leave the gold standard altogether.

People have argued that our U.S. dollar is worthless because there is no basis for its value.  Since we no longer have a precious metal backing our U.S. dollar, we now have fiat currency.  That means that we are all simply trusting that a U.S. dollar is worth something.  The only difference between the Monopoly game money and the U.S. dollars you have in your wallet is that one is printed by the government as official U.S. currency; and the other is not.

As a practical matter, it really never made sense to base the value of our currency on the amount of a commodity like gold.  This basis is quite arbitrary.  Some argue that gold-backed money would prevent our government from playing fast and loose with its debt; but that has never been true.  The U.S. has had government debt since we have been a government.  Ironically, once we got off the gold standard, we were able to control the actual value and repayment terms of that debt.

Conclusions

Our national economy and the world economy are quite complex.  I have tried to communicate my thoughts on our economy and how we can create the best environment for job and wealth creation for our citizens.  I am sure that a reader of this post may disagree with my assessments, and I welcome your comments on my Facebook page.

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