August 20, 2010
The Economy Must ChangeBy Steve McCann
The people of the United States have been blessed to live in a country that has experienced, over the past seventy years, the most sustained period of overwhelming prosperity in the history of mankind. However, due to the staggering growth of government, unrealistic expectations of the citizenry, and a new global economy, the current makeup of the economic engine of the country is such that it will not be able to generate sufficient wealth to finance the nation's long-term financial commitments, jobs, and desires of the populace.
Only by a reduction in government interference and an emphasis on massive wealth creation can the country be saved from its headlong dash toward fiscal disaster and the end of the United States as a global superpower.
The unfunded liabilities of the federal and state governments are over $105 trillion. That is 7.5 times the gross domestic product (GDP) of the country in 2010 and 1.4 times the net worth of the United States.
The national debt will be the equivalent of 100% the annual GDP by 2018. Four expenditure items -- interest expenses, Social Security, Medicare, and Medicaid (Obamacare) -- will account for 100% of all revenue to the government by 2020.
The United States is technically bankrupt.
It has been estimated by the Government Accountability Office that even with an average GDP growth of 3.5% into the foreseeable future, tax revenues to the government would have to be increased by 51% over current levels to mitigate the unfunded liabilities and structural debt. In the alternative, spending would have to be reduced by over 34%. (This does not include the impact of state and local government liabilities and expenditures.)
The reality is that neither of the two scenarios, or a combination thereof sufficient to accomplish the same, is going to happen.
If there is total reliance on increases in revenue, then tax rates would be raised dramatically. The middle-class working person (not just the so-called rich) in the country would be subject to an average rate of 50%-60% of their income in taxes to the federal, state, and local governments. (The top 2% of income-earners, based on 2011 tax rates, would have an overall effective tax rate in excess of 75%-80%). This would be self-defeating, as history has proven repeatedly that the higher the tax rates, the lower the revenue to the government when rates are in this range.
There is no national will to slash entitlement programs by nearly 40%, as so many have become dependent upon them. Americans are a generous and compassionate people and will continue to honor the commitments made to the elderly, infirm, and poor. Nonmilitary discretionary spending accounts for only 16.0% of the federal budget. While some savings there are possible, they cannot begin to offset future expenditure needs.
Many proposals are on the table to modify, partially privatize, and change eligibility requirements with regard to Social Security and Medicare (and repeal ObamaCare). Nonetheless, they must first be sold to a citizenry skeptical of a governing class that has placed the country in this conundrum; further, none of these schemes completely offsets future liabilities, and all depend on robust economic growth.
The reality that needs to be driven home to all politicians, those drowning in a sea of radical ideology, and the average citizen still mesmerized by our celebrity culture is that this nation can no longer provide a high standard of living unless massive changes are made to our economic structure and wealth creation becomes a national priority.
Nearly 80% of the economic infrastructure of the United States is in the service sector. In addition, 71% of the GDP is made up of consumer spending, thus, annual GDP growth is highly sensitive to job creation, personal wealth, after tax income and a low savings and investment rate.
Any economy so dependent on a service sector and consumer spending will, in due course, begin to feed upon itself in an unsustainable manner as the manufacturing and energy sectors (which produce the real wealth of a nation) continue to decline. That deterioration is here for all Americans to see, as job creation, per capita income, and personal wealth have begun a long-term downward spiral.
Many economists proffer the argument that the move to an overwhelmingly service-based economy is the natural course of events in a highly industrialized and technologically advanced society. However, this fails to take into account the factors of world economic development and the same rapid advancement in technology that allow services, which have no intrinsic uniqueness, to be performed by fewer employees and, in many cases, in other countries with lower labor costs.
Further, this evolution to a service-based economy may well function to the advantage of a nation's citizenry in a country with a much lower population base than the United States and one that has a stagnant or declining birth rate. However, in the United States, the current population of 310 million is projected to continue increasing by an average of nearly 3 million people per year (the net increase of entrants into the labor market will be 1.7 million per year).
The United States, if it is to continue as a world economic and military force, must begin to restructure its economy. A program to re-industrialize the nation and to not only become energy independent, but also an energy exporter has to be a priority. The country should have as its goal to increase the manufacturing and energy sector of the economy to 30% to 35% instead of the current 21%.
This program must begin by a massive and concerted effort to eliminate tens of thousands of pages of redundant regulations on the federal, state, and local level. For example, technology has advanced to the point where environmental safeguards are a tenfold improvement over those of 25 years ago; there is no need, except for radical ideology, to maintain a "boot on the neck" approach to environmental concerns. Tort reform must be a priority. While protecting those truly injured, a modified form of "loser pays" should be put into effect.
Taxes on business (particularly manufacturing and energy) have to be dramatically reduced or eliminated. All areas of the United States, except those most highly sensitive, must be opened to oil and gas development, as well as other raw material exploration and development. Research and development has to be given the highest priority, and the products that are the result of this research must be manufactured in the United States. These changes will also have the beneficial side-effect of attracting foreign companies to invest and build manufacturing facilities in the country.
Free trade with other nations should continue to be a priority, but on equal footing and mutually beneficial. Nonetheless, the current trade imbalance should be targeted for a 75% reduction.
The workers of this nation are the most productive in the world; they can, if given the opportunity, compete with other countries and turn out a superior product. The Chinese have a multitude of built-in factors such as population, environmental issues, a centrally planned economy, and the demands of a burgeoning middle class that will keep them from ever overtaking the United States if we as a people are determined to maintain our world standing.
The United States can never solve its fiscal problems and make certain that the standard of living increases for future generations unless it undertakes to become the foremost haven for investment capital and business activity in the world.
Today, this country is still living off the residue of the economic tidal wave that was the Reagan revolution. But that wave has nearly dissipated. Unless policies are put in place that will create the next wave of long-term, high economic growth, the bleak future so many fear will become a reality.