ECONOMY

ECONOMY

It is no secret that out country is facing significant challenges and our leadership is working hard to come up with answers and solutions. As far as I can see, the financial health of our country is one of those challenges.  However, I am concerned that we might be looking at trees while failing to see the forest. We all know what happened when housing bubble burst and financial institutions faced melt down. However, I do not agree with expert opinions on what caused it. Here is my take on the issue and how to prevent it from happening again. Here are some of my observations on the health of our economy;

1)      In the 60s, every time there was a tax cut for the consuming segment, the economy recovered and the recession ended. Nowadays, after every tax cut for the consuming segment of the economy, I am talking about working class Americans, Pacific Rim Countries experience another economic expansion and every time there is a tax cut for the producing segment of our economy, the rich and the wealthy, U.S. Dollar takes another nose dive against Euro.

2)      In the 60s, every time a recession ended, jobs were created, but nowadays, all recoveries are jobless in general.

3)      After the WWII, the US economy supplied goods and services to the rest of the world without any competition from war torn countries like, France, Germany, Britain, Japan and China, but that is not the case anymore. We are no longer the only supplier of goods to the rest of the world and it appears our competition is strong. The proof? Our ever widening trade gap with the rest of the world, which means, our jobs are being shipped abroad.

So how we can solve the challenges we are facing today?

Remember the Economy 101 where we were first indoctrinated about “Supply and Demand”? Well, today I believe it is no longer supply and demand, but rather it is supply, demand and distribution of money, meaning fiscal and monetary policies of our government. Phrased differently, it should read if the money supply to consuming segment of the economy is larger than the money supply to the producing segment of the economy as a result of Fiscal and Monetary Policies, it results in inflation. Similarly, if the money supply to the producing segment of the economy is larger than the money supply to the consuming segment of the economy again as a result of Fiscal and Monetary Policies, it results in deflation. Now, let us introduce the names of two prominent economists, (luckily they are still around), Paul Volcker and Alan Greenspan, well known deflationary economists and former Fed Chairmen whose main job was to fight inflation. For the nearly 20 years, they were at the helm at Federal Reserve and relentlessly pursued a “Deflationary Policy” draining money supply from the consuming segment and in doing so, preparing our country for the financial meltdown we had recently experienced. Tipping point came, when 2^nd Bush Presidency and Administration, further reducing the money supply once again to consuming segment by means of tax cuts to the top 2% in order to reduce the taxes on the producing segment of the economy.  Suddenly, consuming segment had no money to pay mortgages, credit cards, car loans and college tuition expenses, among others while producing segment shipped astronomical sums of capital to foreign countries (decline of dollar against Euro beginning from a parity) for investment in order to reduce labor costs to be competitive in a global economy.

So what do we do now? Almost everything we consume come labeled “Made in Somewhere Else” and as a result, the tax cuts for the consuming segment no longer create jobs here in the United States. The new technologies that are supposed to create new jobs are years away and are not exclusive to us. Trade deficit is in billions every month and the budget deficit is in trillions every year. Our government printing so much money that we stopped publishing M1 Money Supply Data during the Administration of Jr. Bush. A real dilemma, I would say. For whatever its worth, here is what I think we should do;

1)      Switch from a system of taxation on net profit to taxation on gross revenue in order to simplify tax code and increase transparency, both for individual and corporate filers. Under this new regime, corporations and businesses can only itemize payroll expenses for the first US$ 40,000 of compensation for each U.S. based employees only (non transferable between employees) including salary and wages, medical, dental and other health insurances, (part time, commission, contract and performance based pay should be excluded from itemization and no other itemization should be allowed). Tax rates should be readjusted and lowered in order to prevent an effective tax increase.

2)      Increase personal exemption significantly (to 24,000 from current 6,000 dollars per individual) while eliminating itemized deductions for individuals in order to eliminate taxing people living under poverty. According to our tax tables for 2009, if you made 5 taxable dollars last year, our government wants 2 dollars back in taxes.

3)      Increase to top tax rate to 70% for those earning over 1 million dollars.

4)      Remove cap on income subject to social security tax while reducing social security benefits for high end beneficiaries while increasing benefits for low end recipients, which will stimulate demand.

5)      Remove Federal Guaranties from Students Loans that are sold to secondary and tertiary financial institutions by primary lenders. Forgive the first US 100,000 of existing student loans, whether current or not, to reduce the deflationary burden on the consuming segment, primarily middle class.

6)      Rigorously implement on new rules on credit card companies and impose new rules to limit bank charges.

7)      Eliminate all taxes on new business start ups and venture capital investments in the USA for the first 5 years, if they continuously employ at least 1 full time employee with benefits and health insurance.

8)      Gradually switch from a payroll based taxation to a consumption based tax system, which should exclude food, pharmaceuticals and other essential consumer items.

9)      Impose a sale tax on all security exchanges including stocks, bonds, commodities, numismatics, foreign exchanges, options, futures and derivatives in order to reduce short selling and market manipulation.

10)   Coordinate taxing authority of states, counties, municipalities and local governments with that of the Federal Government, including toll roads, user and processing fees, real estate taxes, insurance deductibles and other forms of hidden taxes, in order to prevent over taxation.

11)   Eliminate all property taxes on primary residence at federal, state and county levels.

12)   Eliminate all taxes on U.S. citizens working overseas as expatriates to make it easier for U.S. citizens find jobs in other countries. (Did you know that the U.S. is the only country in the world that taxes its citizens working overseas?).

13)   Eliminate all tax breaks for companies and corporations and phase out all government subsidies.

14)   End the military operations in Iraq and Afghanistan immediately (we can change regimes but we can’t change cultures) and reduce the number of US bases in foreign countries while scaling down the size of the US military.

15)   Reduce or completely eliminate foreign aid.

16)   Reduce the cost of higher education and replace student loans with grants.

17)   Repeal the Bush Bankruptcy Law.

18)   Make it illegal to charge interest rates and fees to non-performing credit card loans and loans sold by primary lenders.

The list goes on, but the idea is simple. Increase the money supply to consuming segment of the economy until a balance between the consuming and the producing segments of the economy is established. Because right now, our economy is top heavy and as a result, it will keep on tipping over.

Now, critics will probably say, this is socialism. I am really not interested in what it is called. Main question here is to identify our nation’s economic challenges so necessary solutions can be found.  Furthermore, our so called capitalist system has proven itself to be unsustainable in its present form and it has to move to the center. It is no wonder that our economy came close to being bankrupt under Reagan and finally became bankrupt under Jr. Bush, both Republicans and supporters  of the “Trickle Down” economic theory. It is clear to me that economies can’t be built from top down, but they should be built from bottom up. Our country’s economic development proves that to be true.

Former Clinton Labor Secretary Robert Reich makes an important observation in his new book “Aftershock: The Next Economy and America’s Future”. On page 21, Fig: 1, he demonstrates a correlation between wealth distribution and the depression of 1929 as well as the great recession of 2008. It is another sign that our economy is top heavy and unless we implement a better tax system to insure a fair distribution of wealth, our problems will not go away. (You should really bring this chart to the attention of your wievership).

As far as I am concerned, it is clear beyond any reasonable doubt that our economy is suffering from a significant imbalance of money supplies to consuming and producing segments of our economy. Accordingly, all remedies should be directed toward striking a balance in the money supply between these two segments in order to induce a recovery with job creation. I firmly believe that nothing else will work and a robust economic recovery will be a pipe dream.