How to Fix the Economy

By John Lumbard.

We have the most ridiculous tax system in the history of the world.  Last year Clorox paid taxes at a 39% rate—nearly twice what they’d pay if they moved to Canada—while GE paid nothing.  The wealthiest 10% of our citizens pay 70% of all the nation’s taxes, but the wealthiest 400 pay at a 17% rate (and hedge fund managers like George Soros see most of their income taxed at 15%).  Many tax questions are so thorny that nobody can tell you for certain how the IRS would deal with them.

All this craziness has spawned a huge industry.  We’ve got far more than a million accountants and tax preparers crunching the numbers, not to mention tax lawyers who scheme and lobbyists who lobby . . . . That hardly sounds productive, but any Washington wonk will tell you that paper-shuffling employs huge numbers of people at a time when we need jobs.  Yes, maybe we should fix the tax system, but this is not the time to do it.

These are tough times, and they’ll stay tough for a while because we’re paying for the excesses of the last decade—when we constantly pumped up growth by borrowing to buy houses and SUVs.  We pumped it up some more with government borrowing and spending that was meant to give GDP a temporary lift, and now our economy has a bad hangover.  Should we keep the patient in bed, or give him a few shots of Red Bull and coffee to get him back on his feet?

We’ll go for rest and recovery—and a thorough physical.  The patient’s arteries are badly clogged.  It just can’t be true that it’s a good idea to employ millions of highly-educated accountants and tax lawyers to do the equivalent of “I lift things up and I put them down”. Simplifying our nutty tax system would be a good thing for our economy, even if we did it right now and caused an increase in unemployment among well-educated and hard-working people.  They would find jobs;  and millions more jobs would be created by America’s businesses, soaring higher and farther without the heavy burden of complex taxation on their backs. 

There might be just as much inefficiency and intrusion in our health care system.  We’re felling forests and filling millions of disk drives to collect Privacy Notices from you every time you turn around, and that’s just the tip of the iceberg . . . Ask any doctor about red tape and paperwork, and you’ll hear some horror stories. 

Congress has also created a trade war with Brazil, which now applies gigantic tariffs to 100 American products ranging from appliances and boats to cars and cosmetics, in response to the harm that we inflicted on Brazilian industry with illegal cotton subsidies, sugar quotas, and ethanol tariffs.  If you want to import Brazilian ethanol you’ll have to pay a tariff of 54 cents a gallon! 

State and local governments play a role as well.  They’ve piled a mountain of burdens onto the backs of businessmen in the last couple of decades, to the point where you wonder why anybody would want to hire a new employee at all.  Recently we spoke with a client, retired from an engineering practice, who told us he felt he had retired just in time.  New regulations were killing worthwhile projects and crippling the ones that survived.  The flood of new regs had created legal liabilities that no one could adequately estimate;  businessmen were becoming risk averse;  and jobs were being lost.

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We can’t lift the fortunes of the poor without embracing a policy of growth.  It was the advancing productivity of workers that brought us—all of us—fresh fruit in the wintertime, indoor plumbing, electricity, and thermostats;  as well as longer life expectancies, telephone service, and truly inexpensive family meals at McDonald’s.

In 1800, 75% of our population was needed to feed our population and produce crops for export.  Today the USDA says that just 2% of Americans are able to handle the same tasks.  Imagine how costly food would be—and how little else we would have—if 75% of the nation were still employed in agriculture.

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Many politicians believe that Depression-era programs such as the CCC and the WPA are the way to boost employment, but there’s a reason why those programs are associated with the Depression.  They helped to prolong it, and they did nothing to increase the availability food, clothing, housing, radios, kitchen utensils, or medical care.  These lessons were re-learned in 20 years of on-and-off recession in Japan (the “Lost Decades”), and in the collapse of the Soviet Union—which offered a job to every citizen and poverty for all

Policies that focus on raising employment instead of growth are doomed to failure.  We can emulate Canada, which had huge debt problems (bigger than ours!) in the 1990s and vanquished them by embracing efficiency and growth;  or we can re-live the experience of Japan, and suffer another two decades of lethargy by focusing on employment and the tired programs of the past.

Yes, we are mired in a long period of debt reduction.  But we have before us a wonderful opportunity to boost growth by unclogging the economy’s arteries.  The good news is that they’re full of plaque and fatty deposits!  Rebirth and renewal lie ahead!

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