America remains mired in crisis because the mainstream economic prescriptions peddled by both parties are wrong. The Democrats want to jolt the economy back to prosperity through temporary stimulus. The Republicans want to slash government spending to make room for permanent tax cuts they claim are the key to economic growth. Moderates in the middle call for stimulus today followed by budget cuts in the future.
All three positions misread America's economic plight. Turning dials on stimulus and tax cuts won't solve the real problems. In my new book, The Price of Civilization, I suggest a new direction.
Washington Democrats (and White House economists) consider themselves to be the heirs of John Maynard Keynes. They view the economic downturn as a temporary shortfall of demand. The role of government is designed to boost demand for a year or two until the "animal spirits" of private investors once again are revved up. A short-term stimulus ostensibly serves two purposes: to bridge the period of low demand and to restore investor confidence in the long-term prospects of the economy.
Washington Republicans consider themselves to be the heirs of Adam Smith. They view the economic crisis as resulting from the lack of profitability of business investment and entrepreneurship caused by excessive taxation and regulation. The Republicans argue that any government spending must be covered by taxes, either now or in the future to pay off government debts. The key to low taxes, they note, is low spending in the first place.
A few self-styled moderates want to have it both ways: stimulate today and reduce the deficit in the future through planned cuts in spending. One obvious question arises in the moderate proposals. When does "today" end and the "future" begin? The stimulus in 2009 was followed by another round of temporary tax cuts at the end of 2010, and now by Obama's proposal for yet more temporary cuts in 2012.
In my opinion, all three positions miss the essential point. The U.S. economic crisis is structural, not cyclical. We are experiencing forces that have been at play for a generation, not a short-term drop of consumer demand that will quickly recover. The long era since the early 1980s has been characterized by low and falling tax collections, not a rising tax burden, but tax cuts have been to no avail. Something much more basic is missing from the diagnosis.
What is missing is the changing global economy. America has been hit by waves of technological and geopolitical change that have upended the old strategies for good jobs and middle-class incomes. The information revolution has knit together production networks that now span the globe. Apple may be an American company but it is employing up to 1 million Chinese workers to produce the iPads, iPhones, and other electronic wizardry that are the new staple products of our economy and culture.
America's challenge is not merely to create jobs. The key is to create good jobs at good wages. Such jobs cannot be created by a short-term jolt of government spending, or by cutting government investments in education, science, technology, and infrastructure. Adam Smith and John Maynard Keynes, who were both acutely aware of long-term productivity as the source of sustained economic wellbeing, would agree. And even as the guru of free markets, Smith had emphasized the importance of publicly financed education for the benefit of the whole society.
The key today is to raise American productivity sufficiently to restore the competitiveness of the American workforce in a tightly linked global marketplace.
Americans with a college degree are generally okay. Their unemployment rate is 4.3% and average incomes are above $60,000 per year. There are many help-wanted signs for talented computer programmers, engineers, and other high-skilled workers. Americans with a high-school diploma or less are falling into poverty, with unemployment of 10% and incomes averaging less than $30,000 per year. For these workers, the only help-wanted signs are for dead-end jobs that lead to poverty.
What is surprising and distressing is how few young people are finishing a four-year degree or an equivalent path to high job skills. The proportion of young people achieving a bachelor's degree has peaked at around 40%. Many more try college, but ended up dropping out because they can't meet tuitions and can't afford to be out of the labor market for the period of college study.
With America at the brink of financial collapse and class war, it is time for all sides to follow a new direction: a long-term effort to invest in skills and twenty-first-century infrastructure, paid for by increased taxes paid by cash-rich multinational companies, high net-worth individuals, and polluting industries. Rather than creating low-skilled and temporary jobs for our kids, we should be helping kids to stay in school until they have the skills to compete effectively in the new global economy.
The money to pay for this expanded effort can come largely from the top of the income distribution. The top 1% of households took home 10% of household income in 1980 but now take home roughly 23%. Along with this remarkable surge in income after 1980 came tax cuts and increasingly easy access of the rich to offshore tax havens.
It's time we insist that the rich do their part to help rescue America from decline. The tradeoff for America comes to this: fewer mega-yachts and other luxuries for the rich, and millions better educated children and young workers for society as a whole. America will recover when all Americans, especially those at the top of the heap, pay the price of civilization.
Follow Jeffrey Sachs on Twitter: www.twitter.com/JeffDSachs
While we're at it...why not let Sachs put his taxes where his mouth is? If what he's saying has merit...then wouldn't Gates and company follow Sachs's advice if they were given the choice? Heck, why not let all taxpayers directly allocate their taxes?
Forcing taxpayers to consider the opportunity costs of their individual tax allocation decisions is the only way to ensure the best possible use of limited resources. In other words, the invisible hand is always more effective than planners at efficiently allocating resources.
We solved the free-rider problem long ago by forcing people to pay taxes...now we just need to solve the inefficiency problem by allowing taxpayers to choose how to spend their taxes.
Imagine how inefficient the outcome would be if we all had to purchase the same private goods? Yet, everybody thinks it's perfectly natural that we're all forced to purchase the same public goods. The result? Hyperpartisan obstructionism.
Besides, why should people feel a cold prickle when they pay taxes? If we allow them to choose how to spend their taxes then they'll feel a warm glow. It should feel good to contribute to the common good!
Yup, pragmatarianism is the best long term solution to these problems.
Dr. Sachs and the other talking heads one sees on television rarely talk about the economic effect 30 years of outsourcing has caused this country. Here is an example: Go to Walmart or Home Depot and try to buy American. You cannot. Walmart, and to a lesser degree, Home Depot, have become giant Chinese outlet stores. The problem is not the lack of American productivity or ingenuity but the fact that we do not make anything in this country anymore. Our manufacturing base has been hollowed out by 30 years of so-called free trade agreements and federal laws that actually encourage big brand name companies like GE, GM, Apple, Caterpillar, etc. to make their stuff abroad and sell it in this country at a tremendous profit. Thus it is that American corporations have enjoyed record profits during this recession, but real unemployment is still at about 20%.
To me the solution is simple: You adopt the same industrial policy China has adopted. “It you want to sell it here, you must make it here.”
Microsoft depends on these kids knocking on their door for a job but increasingly they can't afford the education required. Our son is an ME graduated 2 years ago and even with an austere budget and our help he still ended up with 30k in debt--and he's lucky.
But that loan is at 7%.
SEVEN PERCENT!!!!!
School shouldn't be that expensive and hamper your future that greatly. In fact Bill Gates has been trying to get some tax reform that directly benefits colleges for this reason. People can't very well go to engineering school and work full time--they have to study too many hours a day. They have to get loans--
if we want American engineers to even exist we have to get with the program. And that doesn't mean making the students pay for more with hope that because they will earn it back later they'll see it as a "good risk". It's already out of balance and increasingly students are just saying "no" to these more diffcult subjects.
So why not have a tax for these corporations that use this kind of talent and put every dime of that into schools?
Wrong....America remains mired in crisis because of the liberal progressive (mainly Democrat) agenda to eliminate private property rights of individuals over the past 100 years. Period. It's not real hard to figure out.
The top 10% pay almost 100% of the taxes, the bottom 50% pay diddly squat.
Just how much more do you think they should pay?
Your bold proposal is mostly right on:
With America at the brink of financial collapse &class war, it's time for all sides to follow a new direction: a long-term effort to invest in skills and twenty-first-century infrastructure, paid for by increased taxes paid by cash-rich multinational companies, high net-worth individuals, and polluting industries. Rather than creating low-skilled and temporary jobs for our kids, we should be helping kids to stay in school until they have the skills to compete effectively in the new global economy.
The money to pay for this expanded effort can come largely from the top of the income distribution. The top 1% of households took home 10% of household income in 1980 but now take home roughly 23%. Along with this remarkable surge in income after 1980 came tax cuts and increasingly easy access of the rich to offshore tax havens.
It's time we insist that the rich do their part to help rescue America from decline. The tradeoff for America comes to this: fewer mega-yachts and other luxuries for the rich, and millions better educated children and young workers for society as a whole. America will recover when all Americans, especially those at the top of the heap, pay the price of civilization.
He doesn't. He explains the mistake the main parties are making, explains the problem, and explains what to do to fix it. There's no mystery, enigma, riddle, or combination thereof.
"Why is it that people like you and many of the talking heads on TV say, like you said above, “The key today is to raise American productivity sufficiently to restore the competitiveness of the American workforce..."
That's not what he's saying. It's the conclusion, and if he gave only the conclusion it would be a hollow argument. What he's saying is that we need to abandon cuts and short term stimulus for a long-term investment in modern infrastructure and training, so that the next generation of Americans will have the tools to face the world. It's not about increasing 'productivity', although you might imagine that is an intended result, it's about saying where you want to go and the methods you use to get there.
The problem is not the lack of American productivity or ingenuity but the fact that we do not make anything in this country anymore. Go to Walmart or Home Depot and try to buy American. You cannot. Walmart, and to a lesser degree, Home Depot, have become giant Chinese outlet stores. LTG, our manufacturing base has been hollowed out by 30 years of so-called free trade agreements and federal laws that actually encourage brand name companies like GE, GM, Apple, Caterpillar, etc. to make their stuff abroad and sell it in this country at a tremendous profit. Thus it is that American corporations have enjoyed record profits during this recession, but real unemployment is still at about 20%.
To me the solution is simple: You adopt the same industrial policy China has adopted. “If you want to sell it here, you must make it here.”
We need to focus on a Great Renewal and turn our energies for at least a generation (globally) to healing our planet through these types of jobs in the millions .... worldwide.
Build millions of miles of bike and horse paths
Replant diversified forests, grasslands and hedgerows
Tear down derelict buildings and parking lots and plant urban farms
Retrofit all buildings
Build light rail and trollies
Clean up every creek, stream, river, lake, beach
Put solar hot water and micro wind on all buildings
Develop clean energy
Put water catchment on all buildings
Modernize water, sewage systems
Put all power lines under ground
We need to rethink, regrow, regenerate, re-envision, redesign, refurbish all aspects of our environment and turn our money into healing our planet. Without a healthy environment we will have no economy.
What has happened in the past 40 years is an outrage. Watch Bag It http://www.bagitmovie.com/
And join us at The Great Renewal http://www.facebook.com/TheGreatRenewal ... we must now post positive actions that are being taken to change the whole dynamics.
Relative to America's economic woes, the problem is not the lack of American productivity or ingenuity but the fact that we do not make anything in this country anymore. Go to a Walmart or a Home Depot in the United States and try to buy American. You cannot. Walmart, and to a lesser degree, Home Depot, have become giant Chinese outlet stores. In America, our manufacturing base has been hollowed out by 30 years of so-called free trade agreements and U.S. laws that actually encourage our brand name companies like GE, GM, Apple, Caterpillar, etc. to make their stuff abroad and sell it in this country at a tremendous profit. Thus it is that American corporations have enjoyed record profits during this recession, but real unemployment is still at about 20% in this country. MBAs and other degrees (with the exception of engineering) do nothing to get a person a job in this country. Just ask those participating in Occupy Wall Street, and they will tell you that.
To me the solution is simple: You adopt the same industrial policy China has adopted. “If you want to sell it here, you must make it here.”
The solution to the structural problem must include more manufacturing in the U.S. to provide middle class jobs for at least some part of the 60% of high school graduates who don't go on to get a higher degree. Some of them will get jobs constructing infrastructure, office buildings, etc. Some will be stuck with lower-paying service jobs in retail stores and restaurants, hotels, etc.
Education is not likely to greatly reduce the 60%. Most of the 60% could borrow and work summers to get enough money for community or state schools IF they had the educational foundation or needed study ability. They don't. Apply the concepts of diminishing returns or Tyler Cowen's "low hanging fruit" to the 60%. Maybe 50%-60% is it.
In your long-term solution, you ignore the need to decrease the annual deficits gradually, despite growing Medicare & Medicaid costs. We probably CANNOT get enough revenue to increase infrastructure and education spending, while redicing deficits, by taxing only the upper 1% (rate up to 40% or Harry Reid's millionaire 5% surtax) and large corporations. What we probably have to do is let ALL of the Bush tax cuts expire at the end of 2013 or use the threat of that to get a better tax increas/reform plan from Republicans in December of 2012.
As President Obama talks about repairing the nation's infrastructure, i.e. roads, bridges and schools, he should focus his efforts on urging Congress to pass legislation to repair the archaic legal INFRASTRUCTURE of our employment system. The answer to our jobs crisis lies in an innovative concept known as Universal Employment. To find out more about the benefits of universal employment and how it can be used to create organic jobs growth and get millions of Americans back to work, check out: http://geni360.com/blog/?p=57.
I have a small business which until six months ago actually had employees. In July of 2007 I had eight of them. Then the bottom dropped out of the real estate market. Today I am a "solopreneur" working out of a bedroom in my home with my two dogs as supervisory personnel. I should have done it 20 years ago.
When my title abstract business gets ahead of my ability to meet deadlines, I now contact a network of independent title abstractors and farm out a title search or two. They do the same to me. I don't have to file quarterly payroll tax returns, worry about insurance or a 401k plan--except for myself.
My income took a nosedive when I was trying to carry employees until things turned around. Once I acknowledged they weren't going to and took steps to protect my own income, life got incredibly better.
My former employees are now also "solopreneurs" doing as well or better than they did with me by using their own contacts to increase their business. We are all still extremely close, and have formed the core of our newly developed "network."
You are so very right that there is an entirely new paradigm at work which the state and federal government have no clue what to do with. However you must remember that government is also about a decade or two behind technological advances as well.