How to Transform the US From a Debt to an Equity Economy
I originally wrote this at the end of 2006, largely because of the need to find a way out of mammoth amount of debt in the US economy. This article and the ideas presented are salient to the recent push to drill in Alaska and offshore. While I have heard a great deal of rhetoric from both candidates, little of it makes economic sense. McCain wants to institute another round of supply-side policies despite the fact that the previous two times these ideas were implemented the US increased its overall debt at a mammoth level (see charts below). While I agree with Obama's overall concept he faces a different problem: he inherits a federal government that is deeply in debt. I explained his basic problem here. The problem with both candidates is no one is accepting the fact the US is in a dire situation at the federal level. Dire situations call for radical solutions.
The US' current economic trajectory is unsustainable in the long run. The domestic economy is dependant on foreign capital to finance consumption beyond our production. The US government has issued over $500 billion dollars in net new debt per year for the last 4 years, indicating the budget deficit is not under control in any meaningful way. The US consumer has taken on an enormous amount of debt to finance the latest economic expansion. In other words, debt saturates every level of the economy to a harmful degree.
What I am about to propose is a radical departure from the overall current economic policy of the United States. Implementing this policy will require an incredibly difficult debate and policy application. The application of this program will hurt many people. Ideally, we should spread the pain out among as many people as possible. However, the pain cannot be avoided. In addition, implementation will take a great deal of time. The method of paying for this plan will be extremely controversial, especially among Democratic circles. Implementation will take consistent effort and sacrifice.
THERE ARE NO EASY ANSWERS TO THE OVERALL PROBLEM. The sooner we accept the reality there will be some pain for everyone, the better off the process will be. As a country, we have lived beyond our means for far too long; it's time to pay the bill. We have a very bitter pill to swallow. The best thing we can do is swallow the pill and move on.
The short version of this plan is simple: The US must move from a debt to an equity economy.
Overview of the Problem
The US international trade deficit has trended to a more negative position over the last 15 years. The following chart is from the St. Louis Federal Reserve:
A trade imbalance indicates a country is consuming more than it produces. The country with the trade deficit must borrow money too fund the difference between consumption and production. At the current level, the US must import roughly $2 billion/day to finance its consumption. At some point, creditors will demand a higher interest rate for the increased risk associated with holding US debt. In addition, it is also possible for the host country's currency to drop in value. Should the currency drop in value, the host country has a greater likelihood of importing inflation. Neither possible scenario -- an increase interest rates caused by increased perception of risk or a devaluation of the host country's currency - is beneficial for the host country.
The federal debt situation is just as dire. The problem started with the implementation of supply-side economics in 1981. While the Reagan administration loved cutting taxes, they did not cut spending. As a result, the Federal government issued a large amount of debt, increasing the debt/GDP ration from roughly 30% in 1980 to over 60% in 1988. Bush 43 implemented the same policies with the exact same result. According to the Bureau of Public Debt, the US has issued over $500 billion in net new debt each year for the last 4 years. (For a complete listing of government and revenue and expenditures, please go the historical budget data (PDF) at the Congressional Budget Office.) As a result of Reagan's and Bush's policies, the US federal government has issued debt to pay for growth. Here is a graphical representation of the situation.
At the household level, we have seen the exact same situation develop over the last 20 or so years. As wages have largely stagnated for a large percentage of the population, households have increased the use of debt to finance their lifestyle. As a result, household debt has continually increased, as the chart below from the St. Louis Federal Reserve indicates.
So, why is all of this debt bad? To quote Dave Ramsey, you're making someone else rich. The person that lent you the money gets some of the benefits of your growth. As the amount of debt increases, the lender receives more benefits in the form of higher interest payments. Eventually, the borrower must pay an amount so large that growth is almost painful. While current payments on US debt are not a large amount of money, we have also been the beneficiary of historically low interest rates. It's only a matter of time before lenders realize the US may not pay its debts and ask for a higher interest rate on their respective debt. This is when we will run into big trouble.
So, we've outlined the problem. That's the easy part. Let's move into how to solve this problem. This is where a great deal of pain comes in, because there are no easy answers. In fact, there are only difficult answers that must be implemented.
Priority 1. Balance the Federal Budget.
Here are the benefits of a balanced budget.
It prevents crowding out. This is a fancy way of saying money that would finance the federal budget deficit is instead invested in private capital. Let me use the current situation as an example. According to the Congressional Budget Office, the US had a $318 billion budget deficit in 2005. That means $318 billion dollars was not invested in the private economy, but instead invested in US government bonds. The larger the deficit, the less money available for private investment.
Psychology and uncertainty. A budget deficit detracts from individual's confidence in the market and the overall economy. As individual's look to the federal deficit, they understand that at some time the government must pay back the money it borrows. That means the government will probably have to either raise taxes (more likely) or decrease spending (far less likely whichever party is in control of the government). Deficits create psychological uncertainty. The larger and more persistent the deficit, the less happy people are and the less prone they are to take economic risks.
One of the primary reasons for the economic expansion of the 1990s was the prevailing sentiment among business leaders that Washington was finally in control of the deficit. This created an environment of confidence which increases economic potential. It's that simple.
So, how do we balance the budget? First, we either let the 2003 tax cuts expire naturally with their built-in sunset provision or we raise them. I would argue against raising taxes immediately because of the current slowing of the overall economy. I would argue we wait until at least the 3rd quarter of the next economic expansion before we consider this. We also need to look at several other options on the tax front, including reforming the estate code, increasing the maximum amount of income subject to social security taxes and certain corporate giveaways. This is all subject to Congressional give-and-take. But, the bottom line is that if we want to balance the budget we first need to increase government revenue.
In addition, spending has to be cut. And honestly,all programs must be on the table. That does not mean all programs will be negatively impacted to the same degree. However, the Federal government spends a lot of money; we have to decrease the rate of spending to a large degree. For the last 6 years, federal spending has increased an inflation adjusted 35%. That level of spending growth is simply unsustainable.
This process of balancing the budget will take awhile. I would guess at least 6 years if not longer. It will take constant concerted effort. And it will mean a lot of people will catch a lot of flack for the consensus decisions reached in the process. This is where political skill comes into play -- the ability to sell this achievement to the electorate in a away that allows Dems to continue the process. It will be a difficult sell -- especially after the Republicans have won elections on easy, something-for-nothing themes. I do not envy any political consultant's job in this task.
OK -- that's the federal side of the deficit. As promised, it is not a pretty picture. However, it is what must be done. Now, how do we deal with the consumer debt?
The first point to make is consumer debt is really a problem of poor wage growth. Save the 1990s, wage growth for most Americans have been stagnant for some time. What has made the "standard of living" bearable is the cost of many things has come down, allowing consumers to feel richer without really being richer. In other words, the central issue is how to create better paying jobs which actually increase wages for most Americans. So, how do we do that?
We take a page from Asian development which has a track record of success. We coordinate three different policies: education, domestic investment, and industrial policy
Priority 2: Education
American manufacturing has undergone a fairly radical transformation over the last 20 years. We have moved from (for lack of a better phrase) a pure brawn model to a brawn and brains model.
But manufacturers, regardless of size, specialty or location, across the USA are reporting a dire shortage of skilled workers: people such as welders, electricians or machinists with a craft that goes beyond pushing buttons or stacking boxes but does not require a degree.
In a survey of 800 manufacturers conducted by the National Association of Manufacturers (NAM) last year, more than 80% said they were experiencing a shortage of skilled workers. In October, manufacturers surveyed by the Federal Reserve Bank of Philadelphia said "finding qualified workers" was their biggest business problem.
The shortage of skilled workers is the result of a number of factors. One of the biggest is that manufacturing in the USA is becoming more high-tech and skill-based as the more repetitive, less-skilled work is moving abroad. Such jobs require greater expertise.
Innovation in the manufacturing sector means that the jobs require greater skills than ever before. According to an analysis by economists Richard Deitz and James Orr at the Federal Reserve Bank of New York, employment in high-skilled manufacturing jobs rose 37%, or by 1.2 million jobs, from 1983 to 2002. At the same time, low-skilled factory jobs dropped 25%, or by approximately 2 million workers.
A paper titled The Changing Nature of Manufacturing in OECD Countries highlights the problem as well. On page 8, the paper notes, "The graph shows that most of the decline in manufacturing employment over the past three decades has occurred in only two activities: textiles and metal products." The bottom line is the developed world is moving to increasingly high-tech manufacturing.
However, as the evidence from the Federal Reserve and NAM indicate, the US workforce is not ready to make this transition. This means, quite simply, that Americans must go back to school. And high school education must be expanded in important areas -- especially math and science. This is what the Asian countries did and still do for the most part. They concentrate education in the primary areas -- the American equivalent of K-12 -- and make the program much more demanding than their American counterparts.
In addition, we need to improve access and the cost structure of trade schools in huge proportions. There are industries which are currently in their end -- stage, at least in the US. Textiles lead the way, as do other more purely brawn-oriented manufacturing. Employees in these industries must be given the benefit to retraining if they are able to make the transition. If they aren't, we must insure their respective pensions are secured so they can live-out their retirement in dignity.
Priority 3: Targeting high-growth industries
This is the final area to discuss, and frankly it won't take long. The bottom line is there are several industrial areas that everybody knows show high-promise as industries of the future. Alternate energy development probably tops the list. The world's energy resources -- particularly oil -- are either at their peak or near their respective peaks. The world market is in desperate need of a true alternative to oil/petroleum as a means of energy. And it's time a country spent the capital necessary to develop one or all of the possible alternatives. I cannot speak to the possibilities. However, I know they are out there.
Two of my personal pet projects are stem cell research and nano-technology. I am sure there are others.
The primary way we target these areas is with money - as in massive amounts of federal dollars going into think tanks, research groups and universities to develop these ideas. Pure research has consistently demonstrated itself to be the mother of most of the greatest inventions. Therefore, funding pure research is the best way to develop these industries.
Paying for all of this.
I mentioned above that this would be the most controversial aspect of this idea. I guarantee I wasn't lying. However, before we get there, let's sum up the basic problem. At a time when the US economy needs a large infusion of cash for investment, it doesn't have it. The Federal government is in debt up to its eyeballs. Foreigners are financing our trade deficit. And consumers have already taken on debt in near-epic proportions.
So where do we get the money?
We open up Alaska and the Coastal reefs for drilling. I realize the controversy this idea will generate in Democratic circles. However, governing is about difficult choices. And we have a ton of them to make. Just as importantly, the US economy stands near a very dangerous precipice. We are completely dependant on foreign investors to finance our way of life. The federal government is facing serious financial problems. The US consumer hasn't seen a meaningful pay raise is some time. In other words, we have very serious problems. Weighing all of these problems against environmental interests is difficult. However, the long-term benefit of this program (as in 50 years from now) outweighs the drawbacks.
However, we do the following. First, we earmark a large amount of the proceeds from this specifically for investment in the above-mentioned programs. We do this through higher royalty fees and a high tax structure on the companies that develop these areas. Secondly, we put in place stringent environmental regulations. Finally, we put in place provisions about using American resources -- as in American manpower resources -- to perform the work.
So - why should we do this? Frankly, we have little economic or financial choice. The US economy must make the transition to the 21st century. We have little national savings to pull on. We have a government issuing debt like a drunken sailor. And, we have a set of resources that can develop the cash flow to allow us to pay for the above ideas. Just as importantly, as we make the transition we create a large amount of high-paying jobs. The bottom line is this solves a lot of problems.
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And those of us who did not vote for these morons, who did not rack up the debt are gonna get screwed by these criminals and voter idiots.
I claim no responsibility for the shortcomings of everyone else in this country.
Seriously. I couldn't agree with you more. It's maddening isn't it?
Glad to know that.
Agreed.
I sometimes think the country should just get it over with and split along ideological lines. Let everyone choose, draw the borders, and then slam the borders shut. As it is, they're dragging all of us down. The two ideologies are irreconcilable - I really don't believe they can co-exist long-term.
Dennis Kucinich could be our first President.
Why is it that , suddenly, WE have to pay this bill? It was my understanding that we would be passing it off to our children and grandchildren.
See what I mean? flatus KNOWS the bill won't land on his/her doorstep, and is perfectly happy to skip out on the check.
Don't forget, the biggest pig (entitlement or pork, whichever you prefer) in the room is the military. We spend 42% of every tax dollar on the military (versus less than 10% on Social Security). It will be very difficult to be competitive in the global markets until our military expenses are more in line with our competitors.
We could close most of our military bases around the world and make no difference in our national security. In fact the lower militarist profile may improve or national security significantly.
Agreed. Let them handle the truth. We can't afford them. What would it cost without them? I say let's take our chances and if we need to mobilize then. Happened in WW2 and we still won.
Yes. You nailed it.
I was interested in your ideas up to a point. I think that you miss some very key points and situations. You completely ignore the housing collapse and what it has dragged along with it, as well as it's potential further harm to the economy. You have not addressed why the manufacturing jobs have largely gone overseas. It is not a lack of skilled workers alone (certainly that exists), but the cost of American labor.
I would also suggest with all due rerspect that your solution is is at best, nuts. Drilling for more oil is not the answer, and never will be. There is oil in Texas, PA, Oklahoma, they just can't produce it cheaply enough. Take away the corporate welfare and strictly enforce the royalty revenues. At the same time invest heavily in alternative energy, and renewable energy. The answer to our problem is to look forward, not to look backwards.
We're already at a competitive disadvantage as far as corporate taxes and regulations go with much of the rest of the industrialized world. Punishing US corporations even more is more likely to kill the goose that laid the golden egg, rather than generating a large amount of sustainable revenue.
With all the reasons corporations ALREADY have for moving overseas either to the EU or to tax havens, we don't need to look like we're out to get corporations.
I really think that we need to change our system of taxation to stop punishing people for working. We need to tax spending instead of income. If we had a national sales tax, it would put an end to all the tax shelters and accounting tricks the rich now use to avoid paying taxes. Instead of only taxing US companies, we would also get revenue from imported goods, and help balance the trade deficit by putting them on a more level playing field. And of course it would hit all those living in the shadows, like drug dealers, prostitutes, and illegals, who generally don't pay any taxes on their income. That alone would go a long way to improving our economy, in a sustainable way.
A regressive tax. Why didn't we think of that? Sure! That'll fix everything.
I thought Steve Forbes was banned from posting on this site.
Expect to see more jobs shift overseas if Obama ever ties the min wage to inflation.
Wow. I'm really looking forward to seeing how they are going to off-shore pizza delivery.
A big problem is "dollar hegemony." This is the payment of imports with irredeemable fiat currency that gets repatriated as capital investment and credit, which has allowed the US government to borrow for its military adventures at low rates and the US financial system to misprice risk, threatening the health of the global economy and undermining the value (purchasing power) of the dollar. The basis of dollar hegemony is exporting US jobs and capital to low wage and low rent countries in order to keep prices low on imported consumables, thereby undercutting the bargaining power of US labor, along with using repatriated dollars to fund mispriced mortgage and consumer credit risk.
Increasing the extraction of US petroleum reserves is a very bad idea. In the first place, history shows that Big Oil has the leverage to get preferential pricing that places US citizens at a disadvantage. The Idea that it will now be possible to overcome this historical trend is whistling in the wind. Secondly, the US needs to preserve its remaining oil for use after global oil reserves are essentially depleted and countries keep what they have remaining for their own use. Oil will still be an important industrial material for centuries after it is no longer used primarily for transportation. The US should now be thinking ahead instead of squandering remaining resources extending the life of a doomed petro-based economic system for another few years of excessive consumption.
The big savings are to be found in a realistic budget instead of business as usual. The US economy is now dependent on military Keynesianism for a huge transfer of funds from taxpayers to the military-industrial complex, the primary use of which is to protect far-flung petroleum reserves. It is now time to begin committing those funds to green R&D and investment. The US is also falling behind in education and infrastructure. Funds need to be reallocated from essentially wasteful uses. The US is also wasting a huge amount in an inefficient health care system that is substandard in the developed world, and substantial amounts can be recovered from a better design, including single payer.
I am as liberal as they come, but in order to make the changes in health care, tax codes and alternative energy development we desperately need, we will have to compromise somewhere. I think responsible drilling might be the place to start. Global warming is a threat, but in the short term, we need to re-invigorate our economy and our national psyche, and if this does the trick, it will be a price worth paying. Hopefully we can get to a more responsible energy supply via biotechnology and solar technology and avoid long term disasters, but that will take time, and expanded domestic energy production may buy us that time.
I agree. We can also establish a "floor" for gasoline prices by taxing any increased use to go to universal health care. In fact, make it onerous. Tax autos that are below a median fuel standard, puchased after a given date.
The rich can behave anyway they wish, just a slong as it doesn't ruin the future for the rest of us.
@NoTrollZone & Bondad,
so, allowing ANWAR drilling is just a political strategy/c
Do you really expect it to have significant economic impact?
or is it just a 'feel-good' measure?
Investing in alternative energy sources IS a national security strategy.
Interesting, but we balanced the budget {at considerable cost to progressive goals} in the 1990's. The Republicans then stole the 2000 election and blew the money saved, and more besides, on tax cuts for the rich, increased Pentagon spending {while cutting auditing}, two losing wars, etc. The fundamental problem is not economic but political. The US elite is an oligarchy, not an establishment. This means that the US elite does not see wage stagnation as a problem, and is therefore not interested in solving it. If we go in for Clinton's policies again, we need to find a way to make sure it does not end in another Bush administration {maybe even with Jeb in the Oval office}. This post, while an interesting policy wonk argument, does not address the fundamental political problem.
The so called greatest generation sold us down the river. They promised themselves the moon, refused to lift the retirement age so they could live on the gravy train for up to 35 years in some cases, added drug benefits when they knew they could not afford and now want the estate tax repealed. Let's just say NO to them. I know they are our parents, but SO WHAT? In my book, that makes it even worse. Let them all ROT.
Kind of like you boomers sold Gens X and Y down the toilet. You all should pay up!
Kindly distinguish between the average person, and the corrupt leadership that has sold us all out, and is still currently doing so.
It is like blaming the average oil worker for the oil CEOs.
The boomers adequately funded Soc Security by payroll deductions, but our corrupt leaders stole it to finance their wars and croney robber barons.
What you're speaking of is a pittance. You may despise your parents, but most of us don't. Clearly you never grew up and have parental issues. You need psychological help.
Are American's willing to accept some "pain"? The Reagan years started the have now pay later approach that consumers seem to enjoy. Swallowing any "bitter medicine" seems to cause a gag-reflex in this country. The pain of our ways has been deferred by easy and cheap credit. Our discomfort with new fiscal restraints will show our true character. Can we belt-tighten, cut consumption, live within our means and invent the manufacturing items the world will come to see as neccessary and/or desirable? In my mind our chances are at best a coin-toss!
Halaluya!!!
There is someone that knows what to do on this site. Hale even acknowledged the danger in raising taxes...es
"In fact, half of our entire budget goes to the war machine"
Not sure where your getting your data, however, its not based on fact.
Take a look at the last yr's budget, and add up the entitlements versus military, not even close. Entitlements by 2:1.
The solution requires tough. non political actions, agreed, but you have to be realistic with the facts first, and you are not.
Just to be clear -- you are responding to someone down thread and not to what I wrote.
Several problems with your math and the governments way of describing the budget.
They count Social Security and other Trust Fund funded expenditures but those aren't really payed for by your taxes.
They don't include payments of debt created by borrowing to wage the war as a military expense. Your taxes do pay for that
They don't actually include the money we have borrowed and spent in Afghanistan and Iraq because that money wasn't in the budget. Your taxes will pay for that.
They don't count veterans benefits as military and your taxes pay for that.
Make those adjustments and the true military cost is 5-10% over half the federal budget,
"Extreme remedies are very appropriate for extreme diseases."
Hippocrates (460-359 BC), Aphorism i
I see merit in Mr. Stewart's creative solution. If we all cling to absolute ideals we are destined to join the league of third world economies.
I am an avid environmentalist but I could support this idea provided we can manage the risks effectively.
"provided we can manage the risks effectivel
Somehow the caveats are always forgotten and ignored.
Extreme measures are called for, precisely because our debt is today out of control, however not because there is any rational or possible remedy of resolution for repair.
First it must be accepted that our 'Total-Debt' is galaxies above the miniscule $9-Trillion. In fact when 'Individul
From this it is apparent that the 'Total Debt' of America is 'totally' out of control, and very likely why the US-Gov secretly established a (new) America's/Canadian currency (Mexico/USA/Canada) called the AMERO, that apparently will go into effect when the American Dollar defaults on our Total-Debt.
7. Stop the war on drugs. Its an utter faillure. Drug sales could be handled by pharmacies and subject to tax. In turn, pharmaceutical companies would no longer be guarateed full price from medicaire.
8. Cut the defense budget until it is merely twice that of any other country. Make sure it is spent efficiently.
9. Release non-violent offenders. Consider Mom-and-pop hi-tech incarceration so low level criminals wouldn't be thrown in with and educated by harder criminals. Consider projects to transport people from poor neighborhoods to seasonal agricultural jobs.
10. Loosen regulations against low customer volume home businesses. Do everything possible to encourage small businesses.
11. We have to let the dollar devalue. This will be hell for everybody, but it will become easier to pay our foreign debt, our exports will be more attractive, and we will have more tourism. This HAS to be combined with laws limiting foreign ownership of land, water, utilities, media and businesses or we'll really lose our country. MOST democratic countries already have laws that limit foreign ownership.
these actions would certainly help, but the best way to slay the debt dragon would be to stop taxing income, savings, and profits, and make up for it by establishing a scaled VAT: high on luxury goods, almost nothing on essentials. Do not tax earnings, do not tax savings, do not tax capital gains; only tax consumption. We consume too much and save too little. Workers see a chunk of their weekly paycheck withheld before they have a chance to save and /or invest it.
Yes, I'm talking about abolishing the IRS, just like Huckabee and Paul advocated. And they are right. , if we want to be a nation of sovereign savers, investors, and decently paid workers.
And the bonus? The income tax, and other taxes on earnings, are the necessary basis of the enormous federal intrusion into private lives and affairs. Without it, there would be no need for continuous surveillance of citizens' personal finances and activities. Think about it.
I second Dvmx's approach to taxation purely for the sake of the survival of the working class many of whom work 2+ full time jobs just to avoid being thrown under the preverbial train as slaves to taxation.
I suggest we invite privately owned think tanks across the nation to continue to explore and actively create, for the House and Senate,within one calendar year, working models of the following issues to benefit our government and our nation:
- Social Security Drop: let the broken social security system become officially defunct whilest protecting and providing for the presently semi to fully retired generation who fully paid into the program. Remove Social security deductions from gen x/y payrolls giving that group and the generation after it little more to live whilst they knowingly take a loss for payments already given.
-Electricity or bust! : instead of drilling, how about revisiting electric cars? If you haven't seen the docu "who killed the Electric car," you should. electric cars could very well save something for the generations to come as far as some semblance of an Enviornment, Oceans, waterways, wildlife, the ability for humanity to survive on this planet.
humbly yours.
1. Consider the enormous amount of broken electronics and other short-lived consumer stuff as a resource. Create awareness and a tax structure to encourage repair and upgrade shops. Combine this with a requirement that companies reduce their imports of new consumer stuff by 5% a year until the balance of trade is sustainable.
2. The special capital gains tax rate should only apply to the portion of a business that uses American labor and materials. The American people as a whole gain nothing from money invested in foreign countries and currencies.
3. Eliminate the mortgage interest deduction, as most of this goes to the wealthy. Compensate by raising the standard deduction to at least the poverty level. This will be a wash for most homeowners and help renters and the poor also, and in general shift the tax burden up.
4. Simplify taxes to allow only one deduction: people with unstable incomes can stash a portion of their income in a very low interest government account, to be withdrawn and taxed in the year of their choice. This will provide low interest money to rebuild infrastructure.
5. What the democrats are saying: green jobs for the future.
6. Stop tax subsidies for business travel, which is bad for the enviornment. Stop subsidizing private planes. The airline industry will have to be re-regulated and helped through this.
(MORE>>>)
That's a shockingly bad solution to a well described problem. I guess you're assuming that since Clinton/Bush/Cheney have privatized almost everything else, this oil and gas is our last resource and we should auction it off too. That's how the world bank treats third world countries. That's what we're becoming. The wealth and the capacity to create wealth have turned to smoke and death in Iraq, and been offshored to India, and paid as interest to China. The shadow government, the billionaire families and corporations with no loyalty to any country, have spirited the future away.
I listed some ideas in another post. Suffice it to say that the oil under Alaska and coastal waters isn't our only hope. We're a young nation full of people ready and able to work, if we could come out from under the oppression of the arrogant, guiltless rich, as epitomized by Dick Cheney.
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