The General Welfare Economic Recovery & Stabilization Plan
`1. Tax incomes above $1million per year at Eisenhower-era levels, but only in years in which unemployment is above 5% or the deficit is above 100% of GNP.
Rationale:
a. Currently fashionable “austerity” theories contend that lowering the deficit increases business confidence and thereby improves economic performance. There appears to be no theoretical or empirical evidence for these theories. Nonetheless, they remain extremely popular among policy elites and the economic incumbents who fund them. Accordingly, it is appropriate to impose austerity on the upper classes in hard times.
b. Unemployment and large deficits resulting from lower-than-necessary GNP are indications of the failure of private economic elites to fulfill their function. It is therefore appropriate to deny them extraordinary gains in years when they are failing to earn them.
c. Standard macro-economics suggests that demand-deficit recessions, such as the one we are currently suffering, stem from lack of demand: businesses do not hire or invest because they see no profitable opportunities, but their failure to hire and invest means that the citizenry is unable to buy. Shifting income from economic incumbents who are merely hoarding it – not spending or investing – will benefit the economy in two ways. First, the government generally has extraordinary expenses in recessions and therefore is likely to spend even when private sector elites see no reason to, thus increasing effective demand. Second, the extremely wealthy will need to work harder to in order to maintain their standard of living and thus will have incentives to become social contributors instead of parasites.
2. Mandate that the Federal government transfer an amount equal to half the then current Pentagon budget to the states to use for education and other essential services, in EVERY year in which unemployment is above 5%. This shall be in addition to existing revenue sharing or Federal support of state budgets, and shall not result in any reduction of the Pentagon budget.
Rationale:
A recession causes state tax revenues to drop. Since the states must maintain balanced budgets, they respond by cutting their expenses. Those expenses, however, are mainly salaries for employees providing essential services. Thus, state cutbacks reduce employment and worsen the recession. Moreover, the resulting unemployment reduces demand – thus making the private sector less likely to see profitable investment opportunities, making private and public sector employers and ordinary citizens more likely to cut back spending, and generally worsening the private sector side of the recession. This, in turn, reduces tax revenue even more, in a downward cycle.
At the same time, a recession is, by definition, a time when labor and capital resources are sitting idle. Putting idle resources to work costs society nothing. Thus, a recession is the best time for investment in socially useful projects, such as education and other local government services. The Federal government, unlike the states, can borrow or run a deficit during recessions, when costs are low, and repay later from the proceeds of the growth its investment causes.
Automatic stabilizers such as this proposal will reduce the amplifying effect that state budgets have on private-sector recessions. The Pentagon budget is a useful proxy for a large number, since both parties consistently agree that it should be large and growing.
3. Amend the Federal Reserve’s authorization act to mandate that the Federal Reserve seek to maintain unemployment below 5% as its first priority. Add several non-banker members to the Federal Reserve board to represent the interests of the citizenry as a whole in full employment.
Rationale:
Avoidable unemployment is one of the worst social disasters we know. The Federal Reserve, by its control of interest rates, has a great deal of influence over the profitability of the private sector investment opportunities that, in turn, provide most employment. In recent decades, the Federal Reserve has largely ignored its dual mandate, driving inflation down to rates that are too low for full employment or healthy levels of growth.
Since the primary constituency of the Federal Reserve is banks, it is structurally biased towards the interest of creditors in low inflation, even when the national interest in economic growth and full employment require promoting other values than creditor profits.
4. Borrow (at current near zero rates) enough to build a modern high speed intercity railroad transportation system better than China’s, to modernize our intracity mass transit, to make all needed repairs and upgrades to existing bridges, dams, highways, gas and water pipes and municipal sewage treatment systems, to provide high speed internet access to every home and business, to rebuild our electrical transmission system to accommodate a shift to 90% renewable energy, to build the pipelines necessary for a possible shift to hydrogen-based energy systems, and to insulate existing buildings to modern standards. Create a "rainy day fund" funded by 5% of the Federal budget in any non-recession year and direct that it automatically be spent on infrastructure in any year in which unemployment exceeds 5%.
Rationale:
The United States has a vast backlog in infrastructure investment, which reduces our productivity and our ability to compete with more modern countries. In particular, our transportation and energy systems are stuck in an obsolete mid-twentieth century model that is far below international standards. In rail transit, we are no longer even at developing economy levels.
In a recession the lack of private sector initiatives means that the Federal government can borrow at near zero rates and can hire employees and purchase or lease physical resources without causing shortages or driving up costs elsewhere. The only real cost to increasing Federal infrastructure investments at this time is that some otherwise unemployed workers might have the chance to work and some saver looking for a safe place to put his or her money might have an additional safe opportunity to invest. Those are benefits, not costs.
Investing in our infrastructure now will put Americans to work now and increase our growth later. This is the free lunch that economists find so rarely.
The "rainy day" fund automatically sets aside money when times are good to spend when times are bad (and materials and labor are cheaper), to lessen the likelihood of future bouts of destructive austerity.
5. Break up or nationalize all “too big to fail” banks and similar institutions.
Too big to fail financial institutions are institutions that are so important to the financial stability of the country that their bankruptcy or collapse would cause a financial crisis. Financial investors and these banks’ executives are aware that the government will rescue them if necessary. This creates an untenably dangerous and unfair “heads I win, tails you lose” incentive structure. if they are lucky, too big to fail investors and executives will be able to pocket the winnings from their bets. However, if they are unlucky, the taxpayers – not the gamblers – will pay the price.
As a result, the “too big to fail” banks are able to borrow at lower rates than their competitors while taking more risks. In good times, this unfairly allows them to grow faster and out-compete smaller institutions (or buy them, since any company will automatically be worth more as part of a too-big-to-fail bank). In downturns, however, it unfairly increases the burden on the taxpayers, who will be forced to pay for the rescue at the same time that they suffer, through unemployment and reduced growth, the price of bad bank investments.
Worse still, in good times and bad, these companies can use their enormous taxpayer-subsidized profits to corrupt our political process. They can entice regulators to betray our national interests in the hope of lucrative jobs after leaving government service. They can finance massive lobbying efforts to confuse or mislead politicians, press, regulators and the public alike. They can fund advertising campaigns to punish any politician who dares to question their privileges. They can dominate industry organizations, buy up competitors and squelch alternative ways of doing business. And they can, if these legal mechanisms are not enough to ensure their will, even pay illegal bribes.
The country should not have to pay for the gambling losses of a small group of extraordinarily wealthy executives and investors. Accordingly, “too big to fail” should mean “too big to exist.” These institutions should be forced to break up into components that pose no systemic risk. If that is impossible, they should be run by salaried government bureaucrats with no incentives to gamble, and the taxpayers – who must pay any bad bets – should be the sole beneficiaries of the successful bets.
6. Propose a large increase in Social Security, funded by removing the income cap on FICA and restoring the country to full employment.
Rationale:
The recession has exposed the weakness in the American retirement system. With the demise of employer funded defined benefit retirement plans, most Americans have no way to save adequate sums for their retirement.
Individual retirement accounts and defined contribution plans are inherently inefficient. First, to assure a comfortable retirement, each individual must save enough for a far above average life expectancy, although it is not possible for all of us to actually live that long. Second, since individuals can not predict the business cycle, they must plan for the worst case, i.e., that they will need to withdraw funds during a downturn. However, only some people will actually suffer this misfortune. Accordingly, individual plans are inherently more expensive than collective plans.
Social security, because it covers the entire population, need only pay for average life expectancy. Since it is funded by the Federal government, it can ride out the business cycle by running a surplus during good times and a deficit during bad times. Thus, it automatically and at no cost eliminates both the primary inefficiencies of private sector, individually based retirement accounts.
Private sector retirement savings must be invested in securities or governmental insured savings programs. These investments are subject to large costs imposed by the investment management industry. For this reason, privately managed investments typically lag economic growth in the aggregate: winners are balanced by losers, but everyone pays the frictional costs of the investment management industry. In contrast, Social security is funded by taxation that automatically grows with the economy. It thus allows retirements to grow with the economy without paying Wall Street fees.
For these reasons, Social Security is the cheapest and most effective retirement plan available. However, it pays retirement benefits at a level that is too low for middle class Americans to comfortably retire. Thus, benefits ought to be increased.
As an additional benefit, higher Social Security payments will assure that retirees continue to consume during recessions, thus tending to reduce the downward cycle of reduced consumption leading to unemployment leading to reduced consumption. In sharp contrast, Wall Street based retirement accounts are pro-cyclical. During booms, they go up, leading holders to increase consumption or reduce savings exactly when that leads an overheated economy to overheat still more; during recessions, they do poorly, thus leading retirees and savers to cut back and worsen the downturn even more.
Finally, adequate retirement benefits will increase economic growth and innovation. Freed from worry about a future of cat food, Americans of working age will be more likely to take the entrepreneurial risks that, we hope, drive innovation and growth. Moreover, employer-based retirement plans reduce labor mobility: employees may feel unable to leave current jobs for better and more productive alternatives for fear of losing benefits. Adequate levels of Social Security retirement would eliminate this brake on economic progress.
7. Introduce the option of Medicare-or-VA for all. Each year, during an annual open enrollment period, all Americans should be permitted to elect to enroll in either private health insurance, the plan (if any) offered by their employer, Medicare or the Veterans Administration system. To ensure that no American becomes an irresponsible burden on the public, no one should be permitted to go uninsured unless they provide a bond demonstrating financial capacity to cover worst-case scenario medical care needs.
Rationale:
America’s health care system is broken. We spend twice as much as other rich countries, in return for public health results that compete with Cuba. It is time that we moved into the era begun by Bismarck over a century ago.
However, we have two successful and relatively efficient systems serving small parts of our population today.
Medicare offers national health insurance, similar to that offered by Canada or Switzerland, and eliminating the inherent problems of private health insurance markets in which insurers profit by denying care and imposing large overhead costs on service providers and patients alike.
The Veterans Administration, in contrast, offers national health care, on a model similar to our public schools or the British National Health Services.
Neither system is perfect, although both are cheaper and more effective than the failed private insurance-based system that most Americans are forced to use. In part this is because of scale. Their large size allows them to bargain more effectively with monopoly providers such as drug manufacturers and local hospitals. Scale also allows them to invest in better information technology to determine which provider practices are safer, more effective, and less costly. In part it is because of inherent efficiencies. Private insurers often find it profitable to attempt to shift expenses to others even when this increases total cost to the system, and providers and patients must then invest in defenses against that predatory behavior.
Our two existing national systems each eliminate much of this pure private sector waste. The national systems do not have to bear the costs of unneeded and expensive executives or the support staff to deny claims and contest those denials based on market pressures instead of actual need. Moreover, because they cover the entire population that they serve, they are able to make rational decisions to direct patients to cheaper primary care instead of waiting for crises and using expensive emergency room and specialized care.
We could instantly jump from last place to first place among the wealthy countries by taking advantage of our existing systems and the American commitment to competition.
By offering Americans a real choice, we would harness the consumer market to improve our health care results. If inadequate funding or other problems led to a decline in quality or disproportionate rise in costs at the VA or Medicare, Americans would be free to shift to the other system or even private sector alternatives. In addition, each system would be able to learn from the successes and failures of the others. Shifting demand would signal the need for reforms and, if our political leaders act in good faith, allow us to benefit from competition in a way that the existing system, which protects incumbent insurance companies from true competition, does not.
Indeed, in the unlikely event that the private sector turned out to be more efficient than the public sector in providing medical care -- the Medicare-or-VA-for-all system would have no downside. If the VA and Medicare were unable to compete, they’d wither away.
The proposed system would meet the minimum requirements of a decent society: protecting all our fellow citizens, to the best of our ability, from the danger of preventable or curable ill health.
Moreover, it will increase economic flexibility and growth.
- Businesses will be able to compete with foreign companies (and foreign operations of American companies) that do not have to pay for their employees' medical care and therefore can profitably sell at lower prices.
-The labor market will be substantially more flexible and entrepreneurial. Employees will be able to move from employer to employer without fear of losing medical coverage.
- We will see more entrepreneurs and small businesses. People who wish to strike out on their own will be able to do so without fearing the risk of losing medical coverage for themselves and their families.
8. Introduce Family Support Payments. To enable mothers to stay at home or work, every family should receive a payment of $500 per month per dependent child under the age of 18, for up to 3 children.
Rationale:
In the last generation, the “family wage” has disappeared. Today, wage rates are set on the assumption that wage earners are supporting only themselves. The result has been a disgraceful increase in child poverty and enormous pressure on families and marriage. We need to support our families and demonstrate our support for American children in a concrete fashion. Child-rearing is very expensive and every family needs help in fulfilling this essential function. Moreover, we all benefit when children are well cared for and able to concentrate on school instead of survival.
By protecting the income of parents of children, the Family Support Payments will stabilize the economy and encourage faster growth in the future. Children who are assured a minimum level of housing and food will be better able to concentrate on education and obtaining the skills needed for their future economic success and our future economic growth. Parents will be better able to invest in their futures by obtaining an education or starting a business, without concern that they are putting the basic needs of their children at risk. Couples are more likely to stay together with this assistance in child rearing.
Finally, Family Support Payments will automatically stabilize the economy, by assuring that unemployment does not lead to complete destruction of a family’s finances. The payments will help unemployed families maintain their consumption, thus preserving jobs at the companies that sell to them. The knowledge that this safety net exists will allow other families to worry less about unemployment and focus, instead, on more productive enterprises.