With the presidential election turning on the economy, the debate has focused on what's right or wrong with the current recovery, and who's responsible. They agree that growth is too slow and deficits are too high; and unsurprisingly, President Obama blames the GOP for both while Mr. Romney blames the president. The president's arguments are stronger, especially given Romney's risible claim that he can balance the budget and cut taxes another $5 trillion at the same time. The larger point is that the high deficits and tepid expansion are legacies of the financial meltdown, and resolving them would only allow economic policy to finally move past 2008-2009. The next stage of the economic debate, then, should focus on the two critical issues that have bedeviled middle-class Americans for more than a decade -- namely, historically slow jobs growth and stagnating incomes.
A presidential campaign can accommodate only a handful of big ideas. Here, then, are three new policy initiatives to help reignite job creation and income gains: 1) reduce the cost of creating new jobs by reforming payroll taxes; 2) restore the foundation for middle-class wealth by stabilizing the housing market; and 3) enable everyone to become more productive by providing universal, low-cost access to college education and worker training.
Tax reforms offer the best way to reduce the cost of creating new employment and keeping those already employed in their jobs. The focus of such reforms is not the tax on corporate profits. Yes, the corporate tax is an inefficient mess, but reforming it will do little for those looking for work. The right target for job creation is the payroll tax, because it directly increases the labor costs of every employer. The idea here is to stimulate job creation and employee retention by cutting the employer side of the payroll in half, and on a permanent basis. And we can replace the revenues lost to Social Security with a carbon-based pollution tax.
The second idea could help address slow job creation and the slow expansion, as well as widening inequality. Employers have been creating relatively few new jobs, but not only because of the cost of doing so. Employers also are not confident about when Americans will begin to spend again like they used to, creating the demand for the goods and services which additional workers could produce. The simplest way to boost demand is more budget stimulus -- and good luck with that. A more efficient way, however, is to remove any factors holding back normal consumer spending. It's not unemployment, with the jobless rate already down from 9.8 percent to 8.2 percent. Rather, what continues to hold back tens of millions of consumers is the hard fact that the housing bust has left them substantially poorer.
So far, the bust has cost most homeowners one-third of the value of their homes. This is a big deal economically, because home equity is the main form of wealth or saving held by most of the middle class. Consider the following: The bottom 80 percent of Americans, measured by income, own just seven percent of the value of the country's financial assets -- but they also hold 40 percent of the value of all residential real estate. The sharp drop in housing values, therefore, wiped out most or all of the home equity built up by tens of millions of Americans. Before most people begin spending again at the rate required to boost business investment and hiring, housing prices have to stabilize and begin to move up.
Washington spent more than $1 trillion to stabilize the financial markets, which generate most of the wealth of the top one percent to 20 percent of Americans. For much less, we can stabilize the housing markets which generate the wealth of everybody else. The most direct way to do this is to keep people in their homes by bringing down the current abnormally high foreclosure rates. Fannie Mae, which taxpayers now own, could extend low-cost, two-year loans to millions of homeowners facing foreclosure. The funds could be used only for mortgages held by Fannie Mae. And to control the moral hazard lurking in such relief, 20 percent of any capital gain earned from eventually selling those homes would go back to taxpayers.
The third initiative would ensure that everyone can build the skills needed to earn a rising income by providing low-cost access to college education and worker training. First, we could replace student loans with an expanded and upgraded form of national service: Two years of service in the military or the Peace Corps, or three to four years service in Americorps, would earn any young person in-state tuition at a public college or university for four years. Young people considering college would be asked to give something of themselves back in service to the country, and would no longer have to face huge debts that can take decades to work off. In addition, every working American should have access to additional training in the information technologies integral to virtually all industries and jobs. The plan here is one that Mr. Obama supported when he was in the Senate -- provide grants to community colleges to keep their computer labs open and staffed in the evenings and on weekends, so any adult can walk in a receive free instruction.
This agenda is forward-looking rather than present-oriented, so it does not address the deficit. In truth, everyone knows perfectly well what to do about it. Simpson Bowles, Domenici-Rivlin, the Senate Gang of Six all rely on the same formula: Raise new revenues, reform Medicare and Medicaid, cap discretionary spending, and reduce defense spending. This approach, which President Obama supports, broke the deficit logjams in the 1980s under Ronald Reagan and the 1990s under Bill Clinton. The only thing standing in its way today is the intransigence of extreme conservatives who would rather see the U.S. default on its sovereign debt than consider raising taxes. We can only hope that the public will continue to rally around this balanced approach and convince House Speaker John Boehner and Senate GOP leader Mitch McConnell. Once that is done, we can turn to the real business of restoring jobs and income gain.