The Prescription for America’s Economy

by John Brian Shannon

As much as I’d like to simply jot down the prescription to cure what ails the American economy, I won’t.  Not before discussing it with you first.

Any doctor will tell you it is better to question, test, diagnose — and then prescribe. So, on that doctorly note let us commit to what ails the U.S. economy before I go off writing prescriptions.

It seems that America is not feeling too well, although she is still plenty powerful. Just sort of an uneasy feeling, a lack of confidence and somewhat limited flexibility. Underneath it all, she is sitting on top of a mountain of debt which just feels wrong.

Ed Hall’s excellent website has numerous links for visitors who may be interested in America’s debt and deficit information.

Here is a snapshot of what it said today:

The Outstanding Public Debt as of 28 Jul 2012 is:
$ 1 5 , 8 8 3 , 9 7 2 , 7 6 5 , 4 7 2 . 1 6

The estimated population of the United States is 313,211,460 so each citizen’s share of this debt is $50,713.26.

The National Debt has continued to increase an average of $3.90 billion per day since September 28, 2007!

If we add to that debt, the total unfunded liabilities and expenses of the United States, the total  liability of the U.S. federal government rises to an estimated 130-140 trillion dollars when all entitlement spending obligations are factored in. Ouch.

Not quite a ‘Code Blue’ condition, but a little too close for comfort. Time to call a doctor – and a good one!

Economist and former senior federal economic policymaker, J. Antonio “Tony” Villamil, the dean of the business school at St. Thomas University, who served as U.S. undersecretary of Commerce for economic affairs during the George H.W. Bush administration, commented in the Miami Herald on America’s debt situation.

The federal debt/GDP ratio is on an unsustainable path, with the federal debt held by the public surpassing 100 percent of GDP in a few short years, according to the non-partisan Congressional Budget Office (CBO). If we desire stronger economic and employment growth, we need a market-credible, long-term fiscal plan that places the federal debt/GDP ratio on a declining scale. Read the entire article here…

Dean Villamil has labeled the present era as “The New Normal” with cyclical (short-term) and fundamental (long-term) factors at play “that suggest a continued period of sluggish economic activity and slow employment growth…”

He expects the cyclical problems — such as the burst real estate bubble and a huge build-up of private debt, both of which conspired to create the largest economic contraction since the Great Depression — will diminish over the next 12 months leaving America with (only!) some fundamental economic challenges to solve.

[Fundamentally]… at this stage of an economic cycle, the economy should be expanding at a 3-percent to 4-percent annual rate, not at the tepid 2 percent or less, as is the case today. – Prof. Tony Villamil

Professor Villamil believes as I do, that growth-based policy is the better way to solve the economic juggernaut squarely ahead of us. When GDP grows faster than the federal debt, the debt-to-GDP level falls correspondingly, which is a happy side-effect of more and better-paying jobs for citizens, higher revenues for governments and a better educated workforce on account of all those parents who can now afford to send junior to university.

Canada took the ultimate shortcut towards these goals some time ago and it was hailed as a spectacular success. The Canadian government instituted a 7% Goods and Services tax on practically everything sold in Canada, from bubble-gum to skyscrapers and everything in between. This raked in uncountable billions of dollars for the government which allowed it to eliminate the huge deficit, make significant paydowns on the accumulated debt, finance massive job creation programs and restructure it’s financial obligations. It’s an outstanding and well-documented success by any measure.

This success story illustrates a major economic leap for Canada and one easily tailored to the U.S. situation. It should be carefully considered by U.S. policy-makers.

One problem Canada wasn’t required to face, was an economy awash in trillions of dollars of ‘easy money’  which led millions of American consumers towards insolvency when the economy began changing in response to economic events occurring outside the U.S.A. in 2008.

For example, the monetary base, due to Fed action, has exploded to $2.6 trillion as of May 2012. This could create an inflationary spiral in the longer term, causing another great recession. Read Dean Villamil here…

For those who support a massive injection of cash into the economy by the government, this is a fine short-term way to stimulate the economy, provide employment, increase taxation revenue for governments and to temporarily stabilize the economy. It is a fine idea and worthy of serious consideration by American policy-makers.

But while stimulus spending would help the economy short-term, it does not address the core issue of the non-growth government policies which caused America’s economic woes in the first place.

I promised you a prescription America, and here it is;

  • A federal 7% Goods and Services Tax on everything sold inside the country beginning in 2013. Some amount of revenue-sharing should occur. If 50 billion dollars of GST are collected in the state of California by the federal government by Jan 1, 2014, for example, California should receive half that amount back from the feds — which the state can then use to spend on it’s own infrastructure and debt-reduction program.
  • Of the federal government’s portion of the GST — half of it should go to paydown the federal deficit until there is no deficit.
  • The other half of the federal government’s portion of the GST should be used for ‘shovel-ready’ infrastructure projects designed to cut unemployment levels in every state.
  • The planned budget cuts to U.S. military spending and other federal spending cuts should still occur as they are necessary and overdue, but could benefit from a relaxed implementation schedule.
  • A comprehensive, results-oriented, duplication of services and waste reduction study by all federal departments with the emphasis on cost-reduction and streamlining of services.
  • Which easily-treatable illnesses could increase American productivity if that cost was covered by government? We need a list! Spending mere pennies per worker here, can save the country many billions of dollars of lost productivity.

Short-term stimulus, combined with a national sales tax – the proceeds of which to be evenly split with the states, eventual elimination of the federal deficit, massive spending on national infrastructure projects, continued cuts to military spending on a slightly-relaxed schedule, national waste/duplication elimination, along with increases to productivity courtesy of free (minor disease) health care – will have America feeling back to her old-self within ten years — and after that, feeling ever better!

In fact you’re looking better now America — just reading your prescription!

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About John Brian Shannon

I write about green energy, sustainable development and economics. My blogs appear in the Arabian Gazette, EcoPoint, EnergyBoom, Huffington Post, United Nations Development Programme, WACSI — and other quality publications.

It is important to assist all levels of government and the business community to find sustainable ways forward for industry and consumers.

Green Energy blog: http://johnbrianshannon.com
Economics blog: https://jbsnews.wordpress.com
Twitter: https://www.twitter.com/#!/JBSCanada