How To Get The Economy Moving Again

On August 8 George Schultz, Secretary of Everything (Labor, Treasury, and State;  also OMB director) penned an opinion piece for the Wall Street Journal, offering ides for renewal and reform to a country that seems to be suffering from Eurosclerosis.  We’ll stick to the parts that affect the economy and the federal budget:

(1) Cleanse the personal income tax system of deductions and lower the marginal rate on a revenue-neutral basis. The template is right there in the 1986 Tax Act, which passed the U.S. Senate 97-3.

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(2) We all know that corporate taxation is an anachronism. Why do we want a system that encourages American companies to reincorporate abroad? Let the earnings they make in other countries be taxed there, and that’s it. Why give incentives for companies to keep their cash offshore rather than invest it in the U.S.? And let’s lower the corporate tax rate to be competitive with the rest of the world. How about 20%?

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(3) We all know that the maze and uncertainty of the regulatory octopus is stifling the economy. Regulations are needed, but they can be made simpler and designed to work better. Overhaul the current complexity so that even small businesses can see how to comply without having to hire compliance advocates they can’t afford.

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(4) While we are reducing uncertainty, why not take the mystery out of the Federal Reserve? The Fed can establish a rules-based monetary policy with the ability to deviate from the rules as long as they publicly explain why, using cost benefit thinking in the explanation.

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(5) Get control of spending. Otherwise the burden of servicing government debt when normal interest rates return—a burden that already amounts to hundreds of billions annually—will be unbearable.

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The problem is entitlement spending. There are many well-known ways to put the Social Security system back on track so it will be there for young people in the future. One way is to change from wage-indexing to price-indexing as a method of calculating benefits, and apply the change only to people under the age of 55. That means younger people will receive benefits at least as large as those now being paid with protection against any future inflation.

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Another change is to index the normal retirement age—when people can receive full benefits—to longevity. And when workers reach age 65, stop any payroll deductions and employer contributions to encourage them to stay in the labor force. Their pay will increase and they will be less costly employees. Incentives work.

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(6)  Health-care finance is more difficult, but here is a simple formula to use as a basis for further work. Right now, health-insurance companies are pass-through agents that receive money from the government, employers, and other sources that they spend on a wide variety of health services. But insurance is about risk. The main risks in the health-care area are catastrophic events that have high costs, so high-deductible catastrophic insurance is what is needed. Even young people will buy such coverage because the cost—particularly if insurance companies have to compete across state lines—will be low and the protection these policies give is important for everyone.

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Let’s encourage health-savings accounts. Singapore has required health savings accounts and price transparency since 1984, and even the poor who get government support are motivated to spend carefully. According to World Bank figures, the total public and private spending on health care in Singapore is 4.7% of their GDP compared with 17.9% in the U.S. The outcomes and health-care facilities in Singapore are among the best in the world.

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Most people who make a decent living can afford to put pretax income into health-savings accounts, which they can then use to pay for routine medical services. We also should tweak Medicare and Medicaid so that significant health-savings accounts can be created for their recipients—so most everyone can have access to the health care system. And consumers need more information about the prices of health-care services so they can make informed decisions.

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Finally, we should encourage public and private neighborhood health clinics, which are spreading rapidly and can dispense health care inexpensively. With these changes, the economy will soar. It will be morning once again in America.

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