21 thoughts on “Economic Recovery Plan for the U.S.”

  1. Your plan might be the best for the economy, but shouldn’t ethics play a role too? Is it right to drain a Third World Country for its skilled workforce while leaving the rest behind? Also: Do you think that such an unregulated economy would secure acceptable working conditions and wages for normal workers — whose rights you want to reduce?

  2. Well, Philip. I have observed your comments and ideas for some time now and am generally impressed and in agreement. I was particularly struck by your statement that America’s future looks like Michigan if we proceed along the present pathway. Oh, yeah.

    So are the unions a/the principle bogeyman here? Other societies with strong unions seem to do a better job of providing for their citizens, for example France. Why doesn’t American health care reform deserve a first-level position in your plan? And how can this type of big picture critique of what is wrong today get attention when none of the special interest groups are the slightest bit interested in our “tragedies of the commons”.

    Please keep writing. I well remember your early retirement posting.

    Tim
    Syracuse, NY

  3. I think looking to the future means education. We as a country need to retain or regain our position as a technology innovator.

    Studies have shown students do much better when their parents are involved. In many urban districts, students can choose which schools they go to. Make parental involvement a factor on letting a student attend a school with historically better scores and success.

    We need to “fix” health care. Many of the American car companies are saddled with legacy costs from old contracts. Many of the costs involve health care. Instead of giving the companies cash, we should see if we can come up with a solution to subsidize a portion of the cost of private medical insurance for the elderly and others who cannot afford it.

    We could lower the corporate tax rate, one of the highest in the world, while closing loopholes that allow corporations to move offshore. This is probably political kryptonite, which is why the topic always changes in the debates.

  4. Phil,

    You’re starting to sound conservative. I agree with most of what you have written. I’m a little worried about the military portion and the foreign base elimination. While I’m sure some scaling back of these bases is long overdue, we can’t bury our heads in the sand and believe that we are the cause of all the world’s problems. Pulling out of some of these areas would cause a destabilization that ultimately would detrimentally effect the globe.

    I actually like the plan though, you do need to add a section on governance. Corruption, waste, inefficiency, patronage, entitlement and general scoundrel like behavior has permeated all levels of government and all political parties. A plan to excise earmarks, corruption and thievery needs to be part of any plan like this. Rules against cozy relationships with obvious conflict of interest need to explicitly banned with the threat of prison. (Read Barney Frank, Herb Moses and the House Banking committee)

    All in all a good plan though, I’m impressed.

  5. You completely left out health care (16% of GDP last year, predicted to keep increasing). Unfortunately people consider it insurance, but the only insurance like aspect of it is that most people pay to be insured from seeing the true overall costs. It is obviously in the best interests of the country if a basic level of preventative care, wellness and primary health is provided to all and provided as effectively, efficiently and cheaply as possible. (One individual’s bad health affects all those they encounter, their local economy and ultimately everyone else later on).

    Government spending isn’t cut and dried. It is better that the government provide whatever it can where it is more efficient, especially where profit motives make no sense. Take the FAA for one example.

    A lot of legal woes could be cleared up by using a system similar to the UK. If you bring a lawsuit against someone and lose then you have to pay their costs by default. This reflects that being the victim of a lawsuit has it its costs and encourages resolution of issues by other means.

    A simple way of becoming number one again is to examine best practises around the world. Then steal whatever mechanisms are the most effective.

  6. Some interesting thinking, as always. I’d add the caveat that almost the whole country will look like Michigan on the current path, except New York City. We’re pumping probably a trillion dollars into the financial sector, so it will probably prosper. I think you made this point in an earlier post by saying that we’ll end up looking a lot like England.

  7. A few comments:

    I thought you were a Zionist? Cutting off foreign aid would involve cutting off foreign aid to Israel, wouldn’t it?

    Also, it seems to me that we’re on a destructive positive feedback loop. The problem is that voters have figured out that they can (directly or indirectly) vote themselves other people’s money. When more people are in need, as they are and will be during this depression/recession, they can be expected to demand more of other people’s money, as they did in the 1930s.

    This is a conflict of interest – it’s no different than politicians voting themselves a pay raise or CEOs packing boards with members who will loot corporations for them. People become outraged by the latter conflicts and demand change. The obvious change in this (much more important) case would be to take the vote away from net tax-eaters. But you won’t win many friends among respectable people by saying so.

    Nice plan, but we can expect President Obama to favor policies that are almost exactly the opposite, and with this congress he’ll get his way.

  8. That’s a long document. I could write a response nearly a long, but blog comments are better when they’re short, so I’ll try to be brief and just make a few points.

    First, I agree with a couple of points. For example your proposal to “scale back our military ambitions” is a good one. I would forget about bombing people who don’t like us and restrict the armed forces to their only legitimate purpose, which is to protect our country.

    Also, abandoning the war on drugs is a great idea. It’s pretty clear at this point that the best drug policy would be to give kids at a young age honest information about the negative health effects of recreational drugs.

    On the other hand, many of your suggestions would be harmful to the vast majority of our population.

    For example, increasing the age of Medicare eligibility would be a mistake. It’s probably a shock to most Americans, but the Medicare system is much more efficient than private insurance companies. The need to purchase employee health insurance is a serious cost, both in money and management time, to any business that operates in the U.S. We should do the opposite of what you suggest and extend the Medicare system to cover all Americans. Then, foreign companies who set up factories or offices in this country could focus on doing business and not have to spend time and money dealing with insurance companies, which they don’t have to do at home or in any other developed country.

    The suggestion to increase the eligibility age for Social Security is complicated. The law as it currently stands pays a higher benefit to a person who waits until 70 to start collecting. However, that incentive is pretty weak – not many people actually wait that long. That problem is that most workers, especially those with jobs that involve physical labor or are very stressful, feel worn out and exhausted by the time they get to be 65. On the other hand, our medical industry has the ability to keep even very unhealthy people alive into their eighties or nineties, so they’ll be collecting Social Security for decades. It’s a tough problem without an easy answer.

    Your section “What about Keynes?” is seriously flawed. Cutting government spending during a recession or depression would make things worse. Currently, for example, a number of cities and states around the country are cutting spending, laying off employees, etc. That is only going to make the recession worse in those communities. Even extremely conservative Republican economists would agree with that.

    The same Keynes section also states that the Japanese public works spending of the 1990s caused Japanese corporations to invest in China, etc. That was not the reason that they created jobs in those countries. It was because they could pay much less for labor in those countries than in Japan.

    You also propose to eliminate the minimum wage. Currently it is $6.55 and it is scheduled to go up to $7.25. Your whole “recovery plan” is designed to get businesses to invest in America and create jobs. But what is the point of creating jobs that pay less $6.55 per hour? Those aren’t good jobs.

    Your plan has a lot in common with what happened during the Reagan years, except for the fact that he increased federal spending. He reduced federal regulations, including OSHA regulations. He pursued anti-union policies, reduced the “safety net” social programs and the minimum wage was not increased to keep pace with inflation. The result was that a lot of jobs were created, but they were not good jobs.

    The basic problem is that businesses have no desire to create good jobs. Wages and benefits are expenses that they seek to minimize, which is why they have been moving jobs to places like India and Mexico. If we try to compete with countries like that, America will be a third world country where the vast majority live in poverty and only a small number of people have a decent standard of living.

  9. Chris: “Shouldn’t ethics play a role?” Good question. One of the most unethical things a government can do is set up a system that drives investment offshore and prevents citizens from getting jobs. Another unethical thing that a government can do is to tax a 67-year-old working at Walmart to pay a 55-year-old retired Long Island Railroad worker $130,000 per year.

    Tim: My article does not argue against unions in private industry, only unions for public employees such as transit workers, teachers, sheriff’s deputies, etc. It does seem that industrial unions in the U.S. right now are scaring employers away from certain states. The Boeing shutdown, the GM bankruptcy, etc., would give any manager pause about locating a factory in Washington State or Michigan.

    Cthrall, Roger, and others: You’re right on the issue of health care, of course. If present trends continue, we will be spending 100 percent of GDP on health care. Instead of offering a complex solution, I just said “let’s push Medicare eligibility from 65 to 70”. The massive rise in health care as a percentage of GDP began in the 1960s when Medicare and Medicaid were introduced. If we can cut down the number of people who are on these blank check programs we will stem some of the bleeding.

    c23: “thought you were a Zionist”. A real Zionist moves to Israel! I live in Boston. As a Jew I do have an emotional attachment to the idea that refugee Jews have a guaranteed place to live. On the other hand, as an American I can’t ask my fellow citizens to pick up the tab. And we can’t afford emotional attachments anymore. Folks in Israel and the Palestinian territories are poor compared to Americans, but they are better off than most Africans so I don’t see that the American taxpayer owes them anything. Jewish Israelis have a lot of powerful enemies, such as the entire government of Iran with its multi-billion dollar nuclear program, several hundred million Muslims, Jimmy Carter (I guess he didn’t think the preceding list of enemies was sufficient), et al. If we keep our war machine at full strength we can help Jewish Israelis most by suppressing Iran, the Arab countries that are still at war with Israel, and … Jimmy Carter.

    Luke: I didn’t say that Japanese public works spending caused Japanese companies to invest in China; I only pointed out that their public spending did not create sustainable economic growth in Japan. You ask what is the point of creating jobs that pay less than $6.55 per hour. The point is to create jobs. If $6 per hour is a market-clearing wage for an American who has limited experience, skill, or education, there is no reason for the government to force those Americans to remain unemployed by making it illegal for companies to hire them at market rates. (At the rate that deflation is going, $6 might be enough to buy two or three meals.) Finally you talk about “businesses have no desire to create good jobs.” Classically a business is supposed to strive only to provide a return to investors. In practice a lot of public company managers do try to create some very good jobs for themselves at the expense of investors. Those American workers whose skills, education, and experience make them competitive will presumably find an employer who is forced to give them a “good job” because otherwise some other employer will get the workers. That’s supposedly how the free market works and why a Radiologist earns more than a PHP programmer.

  10. On the subject of minimum wage: I agree that it is past time to change the nature of this entity so as to reflect any inflation or deflation that happens, but if you eliminate the minimum wage entirely you get the phenomenon of companies offering a wage below which people can live on with malnutrition, lack of healthcare and other such problems proceeding. This is already an issue at the currently set minimum wage. It does not make sense for America at large to permit employers to pay employees below a certain wage since the negative externalities from doing so land on the American taxpayer one way or another.
    Your concept of the cause of mushrooming medical system costs seems to be ill-informed. The for-profit nature of the American medical system, its insurance companies and pharmaceutical companies turns that sector of the economy (which cannot generate export revenue) into a giant special interest group which has been inflating its revenues at all costs like diligent private business would. The result is that businesses in America face a horrible cost, management effort, and uncertainty burden in regards to healthcare provisions for their workers. Failing to address this problem will be great for the revenues of the pharma and medical insurance industries but bad for America as a whole. Since healthcare is something required by all citizens throughout their lives it is only through lobbying, thinktank propaganda and other such corruption that the government has not already stepped in to defang this special interest group in much the same way that the utility companies are regulated. Do I need to summon the spectre of the California energy crisis when they deregulated briefly? Is it that hard to make the inferences from the fact that every other major western economy that has greater government intervention in healthcare somehow faces lower costs, counter to your apparent intuition that the medicare system is to blame?
    Also, you may want to fine-tune your suggestions with regards to the foreign aid and agricultural industry suggestions in light of the true reason for these. American foreign aid is a weapon wielded by American business and government to destroy the agricultural self-sufficiency of smaller nations so that American agribusiness can reap captive markets for their subsidy-cheapened exports. Why does America spend so much money on selling cheap food to other nations on multiple levels? It is one of the primary levers of power America has historically used to subdue foreign interests in favour of American investors and other interests in these same countries. The more carrots and sticks America has in their arsenal the greater the effect American efforts to bring foreign nations into line with their aims can be, and this series of expenditures is at least a lot more cost-effective for this aim than American military intervention is. If you are prepared to suggest dismantling the entire coercive structure from top to bottom and damn the whining investors who have invested in American companies that want this protection from foreign governments… that is its own discussion. I guarantee that if America does this however the current copyright and patent maximalization agenda America has been pursuing with at least some success will come to a dead halt, limiting one of America’s current export industries considerably. You will also see a lot more defiance of American aims in the Venezuela and Cuba style including the punitive levying of taxes against American companies and nationalization of their property.

  11. I’m a bit surprised at your nod towards deflation. With all the unfunded government spending of late, I’d have expected inflationary pressures to dominate. I’d appreciate hearing the reasoning behind your expectation of deflation: what are the fundamental causes, and what economic indicators currently suggest it as a likely outcome?

  12. philg: If it was such a good question, why didn’t you answer it? Assuming that this depression will hit the USA much harder than imagined, is it all right if another country drains it for its skilled workforce? (Of course it hypothetically, but this is how it is now in many African countries, where there are almost no physicians left because of emigration.)

  13. Minimum Wagers: In many states the market-clearing wage for most jobs is already above the statutory minimum wage. It is not the minimum wage law that keeps employers from paying people $1 per hour to work in a sweatshop. Suppose that you’re a new pilot eager to build flight time or a fresh high school graduate, living with your parents, wanting to get experience in the electrical or plumbing trade. The minimum wage might keep an employer from hiring you as an apprentice, thus denying you the experience that you need to get the next job.

    Chris #2: I have to admit that I spent the last 7 years waiting for massive inflation. With interest rates so low and government spending so high, it seemed inevitable. But I guess it is time to admit that I was wrong. Labor costs are a big driver of prices in the U.S. and with millions of Americans losing their jobs it would seem that labor costs are going to fall.

    Chris: Is it all right if another country drains away our best people? What’s the alternative? Soviet-style exit visa controls? If a young well-educated American decides that he or she would prefer to emigrate and skip out on paying for trillions in bond and pension obligations incurred by his parents and grandparents, I don’t think it would be fair to chain the young citizen to his or her desk for the next 50 years so that we can extract taxes. I would not expect an African-style brain drain, but something like what happened to England after World War II seems possible (a lot of young English citizens emigrated to Canada, Australia, New Zealand, and South Africa rather than help pick up the pieces and pay the debt incurred while fighting the Germans).

  14. anon:

    Obviously you are not much of a free marketer 🙂

    How’s this for an alternative explanation of the health care industry’s problems.

    1) Health care is taxed
    2) To avoid taxes, companies buy their employees pretax health care plans, effectively 50% cheaper
    3) The employee gets sick, and goes to the doctor
    4) The doctor says “you may have chronic ecphalneurinitinitinis! I’d say its only about a 1% chance, but you should have a 5000$ test to make sure”
    5) Employee: “What’s my copay?”
    6) Doctor: 5$

    IMO the real problem with health care is that the free market is NOT brought to bear, because of the stupid HMOs. If people had to pay for their health care on a day to day basis, they would think twice before going in for some 200$ doctor visit. And, suddenly health care institutions would have to actually compete on price. Do you know that most of the time it is not even possible to ask a doctor what the price is for a certain operation? They take it for granted that you don’t care.

    So, to fix the problem all we have to do is make all healthcare tax free, at which point the HMOs and their bureaucratic waste will disappear, the health care industry, forced to compete on price, will become 2x cheaper, and 80% of the wasted services will go away. Problem solved.

  15. Just getting rid of public sector unions won’t help much and may not be necessary to effect the changes actually required. Unlike the private sector, public sector management salaries are closer to and correlated with the salaries of their employees. Management pension systems are the same as or modeled on the systems provided to their employees. Public sector managers are well incented to raise the salaries and benefits of their employees even without unions. Because government organizations wield state power they are often insulated from the consequences of their poor performance. Unions are not blameless, but the root cause of poor government performance is really the disconnect between performance and consequences at the organizational, management, and line-worker levels.

    At least two inter-dependent changes are required:

    1) Create structural feedback mechanisms that hold government entities accountable for their performance. This is relatively straightforward for some organizations (e.g. schools as mentioned in your plan) but is more difficult for others (e.g. police and prisons).

    2) Enable government entities to easily discipline and fire poor performing managers and employees without bringing back the political cronyism that preceded the civil service era. Unfortunately, I’m not aware of anyone with a clear proven idea on how to do this. Perhaps senior managers could be selected and fired by civil servants while being empowered to discipline and fire those same civil servants.

    The Democratic solution (raise taxes and spending to maintain a decent level of service) and Republican solution (cut taxes and borrow the funds needed to maintain a decent level of service) are both unsustainable. You identify some areas where cutting the level of service is appropriate. Real solutions in other areas will require much more than simply getting rid of unions.

  16. Phil, are you aware that US citizens are required to pay US taxes no matter where they live in the world? (You do get some credit for local taxes paid for countries the US has a tax treaty with). The US is rather unique in doing this.

    Consequently any US citizen moving elsewhere will still have to pay. The only way to avoid it is to renounce your US citizenship which also means you will never be allowed back in the country and you will have to get citizenship of another country.

  18. That’s supposedly how the free market works and why a Radiologist earns more than a PHP programmer.

    I agree with your principle overall, but I disagree with your specific example. The US government created special and elaborate regulations to ensure that Radiologists would be insulated from foreign competition, while it created special visas to ensure that US Corps would be able to hire PHP programmers from overseas.

  19. Re. your proposals on education and allowing parents to chose the school their kids go to.

    In the UK for a number of years much has been made by the government that what people really want is choice in public services. Apparently, people don’t want to go their local hospital, they want to go to the best hospital. They don’t want to send their kids to the local comp (comprehensive school), they want to get them in to the inner city academy a few miles away.

    This is quite clearly nonsense – what people really want is for their local hospital, school or whatever to be up to scratch so they don’t have to bother finding out where a better alternative is and then spend half their lives (in the case of schools) ferrying kids to and from.

    Furthermore, it is impossible for everyone to send their children to the school of their choice – everyone wants to go to the ‘best’ school, which, obviously, has limited places. The majority, therefore do not get their first choice – the idea of choice is an illusion.

    The system in the UK gives priority (justifiably – given concerns about inner city transport etc. etc.) to children who live within the catchment area of the school. Only a smallish proportion of places are allocated for those living outside the catchment. This has the inevitable effect of driving up property prices within the catchment of ‘good’ schools – thereby self-selecting middle class children for the good schools and leaving poorer families (whose children typically do less well at school in any case) to attend the schools which no one wants to go to. Which in turns makes their results bad and their place in the league tables drop which means that no one wants to go there . . . . .

    Meanwhile the good schools get all the support one expects from having a bunch of middle-class wealthy families involved (including many parents paying for additional private tuition) which means their results get better, competition for places gets more intense (it has been known for families to suddenly become Christian, if the good school is a church-based institution) and so it all starts again.

    Merely allowing people to chose schools does nothing to improve the bad ones.

  20. I’m interested by your point about needing ‘immigration that encourages high earners’.

    Is that the only way someone can contribute to society by paying taxes? It would seem odd in that case that the UK has been encouraging nurses from all over the world to come and work in the UK health system, as they do not contribute a huge amount in taxes.

    Indeed, a top UK soccer player apparently earns more in a week that a nurse will in 5 years. But which do you think would affect society more – the loss of all the nurses, or all the football players?

    I would be fascinated if anyone could point to any research that shows a positive correlation between an individual’s level of earnings and their contribution to the business or country.

  21. David: In the U.S., a registered nurse earns more than the national average wage (though not as much as a sports star!). With $5 trillion in national debt, I don’t think that we need research to show that an immigrant who is going to pay a lot of taxes is a valuable immigrant.

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