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2012 Election

The Next Ten Years (Part One)

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The 2012 Elections is truly a crossroads for America. It’s not your typical election year rhetoric; it’s not another sound bite.  It’s the truth.

This is the first federal election since 2000 in which the United States will be neither engaged in war or deep in the nadir of a financial crisis.[1] For the first decade of the XXIst century, the United States was battered by headwinds and forced to lurch from crisis to crisis, rather than plotting a deliberate strategy. All political thought was on the near term: 9/11, Afghanistan, then Iraq, then Iraq again, the Surge, then AIG and the whole house of cards.

The candidate who wins in November will be the first in the Oval Office to have his hands relatively free of crises and with both a desire and a recognized need to focus on fixing long-term issues. Depending on how the Congressional elections play out, the next President may have both Houses of Congress with majorities of his own party.

 

In this article I’ll explore the 10 issues which should dominate the next President’s term and which will have a fundamental impact on how well America performs over the next 10 years and beyond. If we get this right, we can solidify our position as the leading nation of the XXIst Century. If we procrastinate or choose partisanship over patriotism, then rumors of America’s decline could be fulfilled within our lifetimes.

  1. Agree to a Grand Bargain to eliminate the deficit and reduce the national debt
  2. Fundamental reform of the tax code
  3. A forward looking energy policy
  4. Improve education at all levels
  5. Fix immigration
  6. Electoral and campaign finance reform
  7. Return to space
  8. Lead in a multipolar world
  9. Address climate change and over population
  10. Support Middle Eastern democracies

1.            Agree to a Grand Bargain to eliminate the deficit and reduce the national debt

Early in 2010, President Obama ordered the formation of a Presidential Commission to study and propose means to improve the fiscal situation over the medium- and long-term. Known as the Simpson-Bowles Commission[2] after the co-chairs, Alan Simpson and Erskine Bowles, the commission first met on April 27th, 2010 and released a final report on December 1st, 2010.

The Commission’s recommendations would have been formally submitted to Congress upon receiving a supermajority of 14 votes in favor out of 18 members. On December 3rd, only 11 of the 18 members voted in favor of the report though, significantly, the split was not strictly on partisan lines.[3]

Subsequently, during the June and July run up to the August 2011 debt-ceiling crisis, President Obama and Speaker of the House John Boehner negotiated directly on achieving a “grand bargain” not only to resolve the crisis at hand, but to lay the groundwork for spending cuts and tax increases over the next decade that would have stabilized the federal deficit and allowed a reduction of the national debt-to-GDP ratio. These talks broke down on July 25th, 2011 and while compromise was reached with the Budget Control Act of 2011, the “grand bargain” was not agreed too.

Today, the “fiscal cliff” is in the news. This refers to the series of automatic, across-the-board spending cuts and tax increases that will take effect in January 2013 unless Congress and the President agree to a deficit reduction plan. Almost every discretionary spending program will see substantial reductions in funding, including defense; the income tax cuts from the Bush-era will be automatically expired for all brackets; the 2% payroll tax cut will be expired; certain taxes of the Affordable Care Act would come into effect at the same time[4]. All in all, the tax increases and spending cuts would be enough to push the US economy into recession (tax increases would reduce private consumption, which is 70% of GDP, and spending cuts would further reduce GDP, both directly and indirectly).

With the national debt is now above 100% of GDP, a grand bargain becomes increasingly urgent. S&P has already downgraded US debt[5], and the other ratings services have indicated that they may do so. For the debt-to-GDP ratio to go down it requires at a minimum that the federal deficit fall below the rate of growth of GDP.

 

That does NOT mean that spending cuts and tax increases must begin immediately. Growth is at least as important as fiscal rectitude, something Republicans seem unable to grasp. What it does mean, though, is that Congress and the President need to approve a budgetary plan that will bring the federal deficit down credibly and reduce the national debt-to-GDP ratio over the next decade.

2.            Fundamental reform of the tax code

I quote from a previous article of mine, “The Five Minute Tax Reform”:

“One of the fundamental issues facing the American economy is the complexity of the tax code, both individual and corporate. The Individual Income tax code is 70,000 pages long and has suffered more than 10,000 changes in the last ten years. Since 1975, the code has tripled in size. Such a degree of complexity and of instability has many large, negative impacts on people and their economic decisions”

Both the individual and corporate income tax codes need major revisions. In both cases, there exist substantial opportunities to reduce complexity, reduce compliance costs, raise revenues and lower existing tax brackets by simplifying the tax code and eliminating tax credits, deductions and special treatment. Consensus must be reached as well on expiring some or all of the Bush-era tax cuts, which were never affordable and are even less so now[6].

 

There would be many benefits. A simplification of the individual income tax code with elimination of major tax expenditures could generate $527 billion per year in tax revenues, $3.4 billion per year in cost savings, and $160 billion per year in increased GDP. [7]

 

US corporate taxes are among the highest in the developed world, and yet there are so many loopholes, benefits, credits and subsidies in the code that many profitable companies pay no taxes or have a significantly reduced tax burden. Corporate tax reform should parallel the individual income tax reforms: elimination of tax expenditures, significant reduction of rates to increase international competitiveness, revenue neutrality or slightly positive.

Any reform must also make provision for permitting US multinationals to repatriate some or all of the estimated $1.2 trillion in profits earned overseas[8]. Although this is may prove a sticking point with liberals, it is more important to have that money reinvested in the US economy. Realistically, the tax on that money will never be collected. If that $1.2 trillion were plowed back into the US, it would generate jobs and new profits, both of which would increase the tax base in the future, and also reduce government spending on unemployment benefits. It is a sound investment.

 

The government should also explore alternative revenue sources that could help reduce the deficit without impacting current consumption or distorting saving and investment decisions. The federal estate tax, which currently exempts assets under $5 million and caps the tax rate at 35%, should be reverted to the 2002 level (exemption for assets < $1 million, maximum tax of 50%). Provision should be made that the inheritance tax does not impede the transmission of working assets, like farms, businesses and rental properties. Such a measure would generate approximately $11 billion in additional revenues in 2013 ($34 billion vs. $23 billion).[9]

The United States is the only advanced economy that does not have a national value-added tax. It has many benefits over the income tax: it is cheaper to administer with higher compliance rates; it does not penalize consumer savings or investments, or reduce marginal incentives to work; it efficiently taxes interstate, online and mail-order sales; it could provide significant cost reductions to states that harmonized their sales tax regimes with a federal tax (saving up to 3% of the tax revenue generated in administrative costs).

 A moderate VAT of 7% (compared to the OECD average of 18%)[10] would generate approximately $500 billion in revenues. Congress should mandate that these revenues be used exclusively for principal repayment of outstanding national debt, as well as providing a “self-expiration” clause once the national debt-to-GDP ratio reached 40%. Such a measure could more easily be reconciled with the public if the express purpose was debt reduction, and a self-expiration clause would prevent the government from later switching the monies raised to other purposes (at least not without significant public backlash).

 

Even with moderate GDP growth of 1.5% over the long term, these reforms could bring the federal deficit under control and reduce the national debt-to-GDP ratio to 60% in twenty years.[11]

3.            A forward looking energy policy

There are a number of energy initiatives being promoted in the United States with a greater or lesser degree of government support. President Bush made a major effort to expand domestic production of fossil fuels, mainly natural gas and oil (remember the ANWR debate?); President Obama has publically pushed renewables and quietly supported hydraulic fracturing and petroleum production (in spite of the Deepwater Horizon disaster). Even the nuclear industry was set for a major revival under President Obama, until the Fukushima disaster in Japan when plans for a major expansion of nuclear power generation were shelved as politically and publically unsellable.

So far, progress has been very positive. Production of natural gas has surged, thanks to the fruition of decades of research and development in hydraulic fracturing technologies during the 1970’s and 1980’s. Production of petroleum has also benefited from the new accessibility to tight oil deposits and reversed a long-term decline. Finally, renewables are becoming a significant percentage of total energy production thanks to significant investment in wind, biomass and solar production (12.4%). From 2000 to 2011, there has been a two-fold increase in solar and biomass production and a twenty fold increase in wind energy production.[12]

 

Consequently, we have seen a sustained decline in US energy imports:

 

The declines in 2008 and 2009 can be attributed to the global economic crisis and the slack in demand for energy as manufacturing fell. However the 2010 and 2011 data points to a sustained secular decline in U.S. energy imports. This has numerous and important benefits for the economy and for the geopolitical outlook of the US.

 

Petroleum imports account for 18% of total US imports and represent 50% of the current account deficit. Eliminating petroleum imports would have a major impact on US trade deficits, which in turn would reduce the drag on the economy caused by the need for sustained capital account surpluses. Domestic energy production not only creates new, well-paying jobs at home, cheap natural gas is improving the competitiveness in energy-intensive industries, which could help reverse the long decline in US manufacturing.

Additionally, energy independence (or something close to it) will free the US from the paramount need since 1973 of protecting and appeasing any state that produces petroleum. The flow of petro dollars and the implicit security guarantees of the US government have allowed authoritarian regimes to flourish in these states. As US dependence declines, a new and different security paradigm can emerge. Already, the US has been able to refocus attention on the Pacific Far East and the Caucasus. Energy independence would allow the US much greater flexibility in “picking its fights” and avoid costly engagements in areas of endemic instability, like the Middle East.

4.            Improve education at all levels

Education is widely recognized as being a prerequisite for the success of an industrial and technologically advanced society.  The same goes for individuals within that society: during the Great Recession, there was a wide divergence in the unemployment rates between college-educated individuals and those with high school diplomas or less schooling. A college degree conferred an additional $20,000 in median income over a high school diploma, with a postgraduate degree worth $10,000 more per year.

 

America has historically been a leader in mass education. In the 19th century, Europe excelled in universities, with German institutions setting the gold standard for higher education. The United States had fewer universities on a par with their European rivals, but a far greater proportion of the population received a basic primary education. These efforts were provided for on the state level and served the country well for over a century. Through the 1950’s, the United States had the highest proportion of high school graduates and college graduates in the world.

This is no longer the case. Other nations have caught on and caught up. America’s educational system has remained largely unchanged since the middle of the previous century, fragmented and parochial. By all measures, US students perform far worse than students from other advanced economies in key literacy measures – reading, mathematics and science. In fact, we have not ranked in the top ten in any of these categories since 2003 when measurements began to be taken and standardized internationally.

  

This rather dismal performance on average hides vast differences in results. Urban whites, for example, score far better on all three measures and near the high end of the scale, as do Asian immigrants. Hispanic and Black students, as well as rural students, are far below average. The balkanized US educational system produces far greater disparities of outcomes than any other educational system in the industrialized world.

Some initiatives are already trying to address these well-known issues. The National Governors Association and Council of Chief State School Officers have formulated and adopted a Common Core State Standards initiative, meant to ensure that all students across the country are college and career ready after high school and that the expectations of learning levels be consistent and quantifiable across the country. As of 2012, standards have been adopted for reading and mathematics[13].

This is a laudable and necessary first step, but there is far more to do. One thing is to provide a common set of core standards, and to develop lesson plans, teaching materials and tests based upon them. Quite another is to address the yawning gaps in funding levels across and within school districts[14]; or to improve the pre-kindergarten preparation of disadvantaged children, which has a major impact on their subsequent performance. Head Start has proven to have measurable positive impacts on cohorts of children that have gone through the program[15], but deficiencies remain to be addressed.

The United States could also improve its focus on vocational education, apprenticeship and adult retraining. Many companies are facing a shortfall of highly skilled specialists, rather than liberal arts generalists. Once a very important part of the American education system, vocational schools had languished until the Great Recession led to a turn-around and surge in applicants.[16]

Finally, the rapidly increasing cost of higher education needs to be addressed. Not everyone wants to or should go to a 4-year college, but an internationally competitive 4-year college should be accessible to all. The fully-loaded costs for a full-time student in a 4-year accredited college or university have been increasing at roughly twice the rate of inflation over the past 30 years.[17]

 

5.            Fix immigration

It’s an old adage that the United States is a great “melting pot”, a country built by immigrants. While true, this statement obscures the historical struggle that has always taken place between “indigenous” Americans and the new arrivals. Starting with the original conflict between Native Americans and European colonists, each group of new arrivals has had to face discrimination and opposition, and has had to fight to carve out a space for themselves. The English despised the Dutch, the Irish and Italians were considered second class citizens, Hispanics have struggled to overcome prejudices despite often predating “white” Americans in the Western territories; Chinese immigrants built the railroads, but were brutalized, deported and murdered; and African Americans weren’t even voluntary immigrants in the first place.

Nevertheless, it is no exaggeration to say that the United States is the greatest nation precisely because it has more successfully integrated the different cultures, religions and ethnicities than other nations. European nations, with the exception of Great Britain, for the most part continue to struggle with the cultural assimilation (or lack thereof) of their immigrants from North Africa and the Middle East; while Japan and South Korea are notably xenophobic regarding foreign workers. China and India are still countries of net emigration, not immigration.. The United States is the preferred destination of almost a quarter of the world’s 640 million adults who would like to immigrate[18] and one of five of the world’s estimated 216 million migrants resides in the United States[19].

Immigrants bring their energy and intelligence to our nation. They are small-business owners and technical professionals more often than they are unskilled workers, which are also necessary. They are a young and dynamic demographic that benefits our economy and culture. Their addition is the key reason why the United States has the most favorable demographic curve of any industrialized nation.[20]

 

This demographic balance has major implications of the US economy and government. Rather than facing a “geriatric cliff” like both Europe and even more severely China do by 2050, the United States could have a solvent pensions and health care system without straining the fiscal health of the nation or raising taxes to economically suboptimal levels[21]. In 2050, while the bulk of the populations of Europe, Japan and China are thinking about or enjoying retirement, a majority of Americans will still be in their most productive years. There is every reason to think that the XXIst century will be America’s century.[22]

For all of these reasons, immigration reform is a major concern for the next Administration. Striking the proper balance between welcoming immigrants and protecting our national security will not be easy, but it will be fundamental for the future success of our great nation.

To be continued in Part Two



Sources and Notes

[1] I exaggerate slightly. We are still fighting in Afghanistan, but the end is in sight. The effects of the Great Recession still weigh on millions of Americans, but again, the trend is clearly positive.
[2] Officially the National Commission on Fiscal Responsibility and Reform
[3] Three of the eleven Democrats on the Commission voted against it (Xavier Becerra D-CA, Max Baucus D-MT, Jan Schakowsky D-IL), while four of the eight Republicans voted in favor of it (Alan Simpson, Mike Crapo R-ID, Dave M. Cote, Judd Gregg R-NH)
[4] Calmes, Jackie, “Recession Possible if Impasse Persists, Budget Office Says”, The New York Times, 22 May 2012
[5] Detrixhe, John, “U.S. Losses AAA Credit Rating as S&P Slams Debt Levels, Political Processes,” Bloomberg, 06 August 2011
[6] Center for Budget and Public Policy analysis based on Congressional Budget Office estimates (2010)
[7] Betancor, Fernando, “3.1. Simplify the Tax Code,” Common Sense, 01 March 2012
[8] Rubin, Richard, “Cash Hoard Grows by $187 Billion in Untaxed Overseas Profits,” Bloomberg, 02 March 2012
[9] Congressional Budget Office, Historical Tables. Calculation is based on taking 2002 Estate Tax Revenue and adjusting for inflation.
[10] OECD Tax Database (2008)
[11] Assumes an annual GDP growth rate of 1.5%, an effective VAT rate of 3%, and an annual Federal deficit of 2%.
[12] Table 1.2. Primary Energy  Production by Source, September 2012 Monthly Energy Review, U.S. Energy Information Administration, 26 September 2012
[13] Common Core Standards Initiative website, reviewed on 02 October 2012
[14] Guin, Kacey, Gross, Bethany, and Deburgomaster, Scott, “Do Districts Fund Schools Fairly?”, Education Next, Vol. 7 No. 4, Fall 2007
[15] “Head Start Impact Study: Final Report,” Department of Health and Human Services, Jan 2010
[16] Kavilanz, Parija, “Manufacturing boom: Trade school enrollment soars,” CNN Money, 31 July 2012
[17] Table 349. Average Undergraduate tuition and fees and room and board rates charged for full-time students in degree-granting institutions, by level and control of institution: 1964-65 to 2010-11, National Center for Educational Statistics
[18] Clifton, Jon, “150 million adults worldwide would migrate to the U.S.,” Gallup, 20 April 2012
[19] Bilateral Migration Matrix 2010, Bilateral Migration and Remittances, The World Bank, November 2010
[20] U.S. Bureau of the Census, International Programs, International Data Base, World Population Data
[21] Assuming that the non-demographic issues of incentives and cost structures can be made fully solvent in a bipartisan fashion.
[22] Betancor, Fernando, “The American Century,” Common Sense, 04 June 2012

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