Let's have a boom! A real boom. A really long, satisfying one--a boom we can pass to our children as our parents did for us.
Today's economy is not a boom. True, the American economy began to grow in June 2009. That's what the GDP numbers say. But, of course, the GDP numbers are flawed. GDP includes economic activity spurred by government stimulus (aka: deficit) spending and does not take into account the dollar's value against commodities and other currencies.
Which is to say, the 2010 recovery is not yet on solid footing. The patient is out of bed, but he walks with a cane and coughs. How do we get him sprinting back into the global economy lead?
How can we have a real boom?
We must start by defining the best levers to growth. Let me suggest seven--there are more, of course--along with some questions and answers. But I really want to hear from you.
1. Size of Government
Historically, the U.S. economy performs best when the size of federal government is about 17% to 18% of the nation's GDP. Under George W. Bush the percentage crept up over 20%. After only 15 months of Barack Obama, the percentage is about 25% and headed higher.
Question: How would you get the percentage back down to 20% or even lower?
Solution: A freeze federal government spending. I would increase military R&D spending, so everything else would have to shrink by 1% to 2% a year. The overall federal budget would not go up until the number dropped under 20% of the GDP.
2. Taxes
Congress has floated the idea of a 5% value-added tax. The Bush taxes on income, capital gains and dividends are set to expire a year's end. I don't think VAT will pass, but if it did, that would be quite a one-two punch. If you make a six-figure income in a high tax state like New York or California, your last dollar will soon be taxed at over 60%. As go your dollars, so goes your productivity: The federal tax code's forest of confusion, moral hazards and ethical traps mean that we spend way too much of our time and energy filling out tax forms.
Question: What is a better tax code?
Solution: If 20% is the ideal size of federal government (as a percentage of GDP), then 20% ought to be the tax rate. It would apply to everyone's first and last dollar and include capital gains and dividends. There would be no payroll tax because it would be built in to the 20% flat tax rate.
3. Strength of Currency
Easy Fed policy always shows up as an asset bubble. This time, it showed up in the housing market, and now we're all paying for the consequences.
Question: What is a better way to a stable currency? Do we need a Federal Reserve?
Solution: Peg the dollar's value to a basket of commodities led by gold. We need a Fed, but it should be much smaller and have one job--ensuring a stable currency. The Fed should not be responsible for employment.
4. Trade and Immigration
I've lumped these two together because there is a larger issue here. How much should America engage with the world? As national policy, is it more important that our large U.S. based multinationals, such as IBM and Apple, succeed as world beaters? Or is it more important to shore up America's weaknesses, such as its declining manufacturing base?
Question: If you are not for complete free trade, then what kind of trading restrictions would you favor? (In other words, don't just rant against free trade. Give specifics: Domestic industries you'd protect, the size of tariffs, etc. On immigration, what do you think of Arizona's new restrictions and Obama's angry response?)
Solutions: I still like free open trade. The solutions for America's troubled industries is not to protect them, but to reduce their tax and regulatory burdens. In immigration, all sovereign nations have the right to enforce their borders. But let's do it with humanity. Let's also play the long game well: When baby boomers are all retired, America will have a labor shortage and a pension overhang at the same time. We will need more Americans working.
5. Energy Policy
The price of energy goes up for two reasons: (1) The dollar is wobbly, which encourages speculation in hard assets, such as oil. (2) Demand for energy exceeds supply.
Question: How can America have dependable and predictably priced energy in the future? Do we need a carbon tax?
Solution: I reject a carbon tax. A stable dollar is enough to send clear price signals. Other ideas: Drill in ANWR, go full-bore on nuclear energy, convert government fleets to natural gas, increase military R&D budgets to investigate potential mid-century solutions such as space-based solar power.
6. Financial Reform
Congress and President Obama have put financial reform on the front burner. Obama himself emits ambivalence on the subject. No surprise, the big banks are located in the coastal urban areas that Democrats usually carry. Obama's 2008 presidential campaign received large donations from Goldman Sachs and other banks. Something else to think about: My Forbes colleague Quentin Hardy, a smart guy and a good guy but with whom I disagree on most political issues, asks if Wall Street sucks up too much of America's IQ. Good question! Look at America's triumphs in over the last 70 years: The Manhattan Project, the space race, the microprocessor boom, the Internet boom. Now what are the great triumphs? Social networks? Pales, doesn't it? Is that because America's all-star nerds all started writing derivatives?
Question: Are America's big banks too big to fail? Would their failure pose systemic risk to the whole economy? Will the SEC hang Goldman Sachs and should it? Were Goldman's deals with short-seller John Paulson legal? Ethical? And do banks and hedge funds suck up too much IQ, diverting this resource from more productive enterprises?
Solution: Banks should be allowed to fail. We don't need more rules. We need to enforce the rules on the books. The SEC should reinstall the short uptick rule. It should rigorously enforce its own rules on naked shorting, leverage limits, etc. SEC employees should not be able to work for banks for five years after leaving the SEC. As for the IQ question ... spend more on military R&D, and make it easier to start a company that makes products.
7. Education
America's universities lead the world, but our K-12 is not in the top 10. This bodes poorly for America's competitive future and even for the strength of its civilization.
Question: How do we get America's K-12 education back into the global top 10?
Solution: Abolish the requirement of an educational degree so that any college-degreed person who is motivated to teach has an opportunity to do so. This would draw more successful people from the private sector into teaching. End tenure and fire the bottom quartile of teachers. Pay the good ones more.
Post your thoughts on any or all of today's question. Be civil, be specific, but fire away.
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