There are countless ways to explain and decipher the inner-workings of the US and world economies. But little is actually discussed about the underpinnings of what truly defines a healthy economy. It's not complicated.
A human body, be it alive, unhealthy or dead, has the same volume of blood. The difference lies in circulation. We are healthy when our circulation is maximized, and our body begins to fail when our circulation is inhibited. The same is true for economies. All entities -- individuals, companies or countries -- are healthy to the extent that they have circulation. For a country, money is the equivalent to the body's blood. And if the money is not flowing properly, the nation's economy suffers.
The government, specifically our current federal government, is equivalent to a blood clot within the economy. It stops the flow of money by removing it from the system and distributing it to largely ineffective government programs, causing the system to work harder in order to compensate. The extent to which we have increasing government correlates to the amount of money being pulled out of the country's bloodstream. One such example is income tax.
Throughout world history there are myriad examples of kings taxing their populations to such an extent that poverty and slavery became normalcy for the majority. In those instances, over-taxation is obvious. But in the modern age, the complexity of government disguises this effect.
Money is only valuable to the extent that is provides incentive for exchange, thereby generating circulation. It's a delicate balance, and people must have a desire for a nation's currency, and those spending said currency must feel comfortable with the process of acquiring more. If money becomes devalued, either due to a lack of faith in our government or because of dilution by the government through printing money at will, there is a halt in circulation rather than an increase.
One example of a halt in circulation occurs when the population is uncomfortable with spending money, which results in the money not flowing. Another is the stockpiling of money on the part of financial institutions and companies -- essentially sitting on the funds and not distributing it throughout the economy -- which is again due to a lack of confidence. That money should be generated back into the system to expand the stock markets and other outlets. With this failing to take place, a double negative results. Not only is the money pulled from the system, but it shocks the system, slows it down, and forces it to work harder in order to compensate.
From there the nation's currency becomes diluted, and other countries and businesses do not value it appropriately, causing a reduction in demand. The most basic example of this is the current value of the American dollar compared to European currencies. Currently the American dollar is worth 73 percent of the Euro -- this in spite of the widespread economical disasters in various European nations such as Greece and Spain -- which is an extremely strong indication of the lack of faith in our country's economy. Moreover, the American dollar is worth a mere 60 percent of the British pound. Only recently has the American dollar been valued equally (slightly higher at present) than even the Canadian dollar. Fifteen years ago, the American dollar was worth in excess of twice as much as the Canadian dollar. Simply put, other nations do not currently value the American dollar, nor do they want it. This all leads to an inhibition of the flow of money throughout the system, and a weakened economy. So what is the solution?
In order for the economy to return to a healthy state, income taxes must be significantly reduced and programs to help, rather than punish, successful businesses must be established. What needs to occur is the opposite of taxation. There should not be continuously increasing taxation because it simply serves to remove money from the system. Contrary to popular belief, most companies in the U.S. have relatively narrow profit margins. You don't have companies with bottom lines of 50 percent, but rather bottom lines of 5-10 percent on average.
When you take that average and increase taxes, a major burden is placed on a company, which forces it to shrink. The company is now in an impossible situation, and must fire employees, cease hiring and often freeze assets that would otherwise be circulated back into the system. It results in an additional downward cycle through blocking necessary circulation. Virtually everything the government has practiced over the last ten years has resulted in a restriction of circulation, with short-term decisions made by elected officials failing to implement a long-term solution and strategy. Ultimately, very little is being done on a federal level to encourage circulation.
If you want a healthy country or state, taxes should be lowered on companies and that policy should then be used as a business incentive to both attract new companies and stimulate the current companies. The result is an increase in hiring, and a newly established confidence in the economy that is no longer intent on essentially punishing successful businesses and individuals. And how will necessary government services be funded? The answer is a usage tax.
Firstly, the government needs to become effectively streamlined as opposed to its current state which is a bloated and an ineffective calamity. Many ineffective programs could stand to be reduced or even removed entirely, and a greater reliance on a usage tax -- taxes on consumption such as goods and services, purchases, real estate taxes, etc. -- established. In December, Senator Tom Coburn outlined specific examples of wasteful government spending including $297 million for an Army blimp and $5 million for fancy glasses at U.S. embassies. The Internal Revenue Service is another example of bloated waste.
The exorbitant costs involved in the IRS could be dramatically reduced via changing the tax code. Establishing a flat tax and simplifying the tax code would reduce the need for oversight and personnel costs due to the fact that specialists with an encyclopedic knowledge of a convoluted tax code would be unnecessary. Instead, all that would be required is someone who can count to ten and apply that knowledge to audit the returns appropriately.
Additionally, essential programs such as infrastructure and education would be properly funded by usage taxes ( and given priority over unnecessary or overfunded social and welfare programs) - a model that has proven to be successful at the state level.
In the U.S., it is rare for increased taxation to actually have a positive impact on state economies. California, where state and local taxes are among the highest in the nation, continues to remain insolvent. However, if states were to rely more on usage taxes the money that would otherwise be collected as income tax would remain with the earner, and therefore be circulated back into the system to stimulate the economy. Many states that have little or no income tax actually have healthier economies than their counterparts with a high income tax rate.
But cuts to the government must be made. California is a good example of a state that is rethinking its policies that have led to insolvency. In the last few years California has tightened its belt and reduced the budget deficit. And it wasn't a result of increased taxes. In fact, the strategy was to cut virtually all government programs by 30 percent, which has had an immediate positive impact in turning the state around. This proves that revenue via income taxes is not the answer to the problems. Rather, it's management and organization. If the government systematically reduces income tax to establish a flat tax that nobody is able to hide from via loopholes and various other accounting techniques, it would propel the country forward.
This must occur if the U.S. hopes to return to a state of legitimate economic health. When circulation is reduced, as it has been in recent years, the result is money accumulating into the hands of the few. The economy, to use the human body metaphor, is a closed system. The same amount of blood (or same amount of money) is available, even if the system is being diluted. The same amount is available in totality, and if money is being pulled out of the system it is then accumulated in certain clots. The end result is a dismantling or destruction of the middle class -- currently occurring at an alarming rate -- and an increase in poor and dependent classes.
Economies are extremely sensitive, and therefore incremental cuts in the government would lead to immediate improvements. Furthermore, it would restore confidence among businesses, immediately sending a message about the mindset of a pro-business government with an increasing currency value. An improvement to the government's policies would soon result in a tangible improvement in the economy.
If we continue along the current path we will, without exaggeration, continue slowly creeping toward becoming the equivalent of a third world country. According to a report in Salon this past December, not a single U.S. city is included in the world's top 10 most livable cities, and only one U.S. airport makes the list of the top 100 in the world. Additionally, the nation's high school students are rated 30th in math, and some 30 countries have longer life expectancy and lower rates of infant mortality.
President Bill Clinton, arguably the best president in modern times, was effective at growing a healthy economy because he was neither a Democrat nor a Republican, in the traditional mold. He was pragmatic and understood that incentivizing business, establishing confidence in the economy, and not punishing success transcended party lines. His body of work helped to promote business on several levels -- both in domestic and international markets with legislation that revitalized NAFTA and deregulated the stock markets. The increase in trade as a result of NAFTA helped increase the value of the nation's currency. There was a palpable confidence throughout the world in our economy as strong and secure. A return to these policies is the cornerstone of a healthy economy, with long-term value and application. We must use history as our guide in this regard, and consider Clinton's tactics an example for how to return to a healthy economy, with maximized circulation. Considering the alternative, that remaining on our current trajectory has such far-reaching and cataclysmic repercussions, anything less is simply unacceptable.
David Bergstein is the CEO of Cyrano Group. He is a board member of the Sheriff's Youth Foundation, an organization dedicated to providing Los Angeles County youth with safe facilities, planned programs, and the vital tools they need to thrive and succeed in life. He is founder of the Leonard and Sarah Bergstein Learning Center at the Conejo Jewish Academy.