America’s K-12 public schools perform poorly, relative to the rest of the First World. Its universities are great fun for the kids, but many students emerge on graduation no better educated than when they arrived. What should be an elevator to the upper class is stalled on the ground floor. One study has concluded that if American public school students were magically raised to Canadian levels, the economic game would amount to a 20% annual pay increase for the average American worker.
The U.S. has a two-tiered educational system: a superb set of schools and colleges for the upper classes and a mediocre set for everyone else. The best of our colleges are the best anywhere, but the average Canadian school is better than the average American one. At both the K-12 and college levels, Canadian schools have adhered more closely to a traditional, conservative set of offerings. For K-12, the principal reason for the difference is the greater competition offered in Canada, with its publicly-supported church-affiliated schools. With barriers like Americans Blaine Amendments—state laws preventing public funding of religious schools—lower-class students in the U.S. must enjoy the dubious blessings of a public school education.
What about immigration? Canada doesn’t have a problem with illegal aliens—it deports them. As for the legal intake, Canadian policies of a strong bias toward admitting immigrants who will confer a benefit on Canadian citizens. Even in absolute numbers, Canada admits more immigrants under economic categories than the U.S., where most legal immigrants qualify instead under family preference categories. As a result, on average, immigrants to the U.S. are less educated than U.S. natives, and unlike in Canada, second and third-generation U.S. immigrants earn less than their native-born counterparts. In short, the U.S. immigration system imports inequality and immobility. If immigration isn’t an issue in Canada, that’s because it’s a system Trump voters would love.
For those at the bottom of the social and economic ladder who seek to rise, nothing is more important than the rule of law, property rights, and the sanctity of contract provided by a mature and efficient legal system. The alternative—in place today in America—is a network of elites whose personal bonds supply the trust that is needed before deals can be done and promises relied on. With its more traditional legal system, Canada better respects the sanctity of contract and is less likely to weaken property rights with an American-style civil justice system which at times resembles a slot machine of judicially-sanctioned theft. Americans are great at talking about the rule of law but in reality we don’t have much standing to do so.
Then there’s corruption. As ranked by Transparency International’s Corruption Perceptions Index, America is considerably more corrupt than most of the rest of the First World. With our K St. lobbyists and our donor class, we’ve spawned the greatest concentration of money and influence ever. And corruption costs. In a regression model, the average family’s earnings would increase from $55,000 to $60,000 were we to ascend to Canada’s level of non-corruption, and to $68,000 if we move to Denmark’s level.
In a corrupt country, trust is a rare commodity. That’s America today. Only 19% of Americans say they trust the government most of the time, down percent from 73% in 1958 according to the Pew Research Center. Sadly, that is a rational response to the way things are. America is a different country today, and a much nastier one. For politically engaged Republicans, the figure is 6%. That in a nutshell explains the Trump phenomena and the disintegration of the Republican establishment. If the people don’t trust the government, tinkering with the entitlement reform is like rearranging deck chairs on the Titanic.
American legal institutions are consistently more liberal than those in Canada, and they are biased toward a privileged class of insiders who are better educated and wealthier than the average American. That’s why America has become an aristocracy. By contrast, Canadian legal institutions aren’t slanted to an aristocracy.
The paradox is that Canadians employ conservative, free-market means to achieve the liberal end of economic mobility. This points to America’s way back: acknowledge that the promise of America has diminished, then emulate Canada.
8 - ECONOMIC GROWTH AND PROSPERITY
The electorate may be ambivalent about whether economic growth in our country is a worthwhile goal, but most certainly every man, woman, and child wishes for prosperity. Both, however, go hand-in-hand. Parents generally wish for their kids to be better off than them, and this implies that they become more prosperous. Achieving prosperity is generally thought to result from hard work, saving for a rainy day, and bettering oneself though education and industriousness. It’s benefited us all to be free of the death and destruction of war in a country where law and order reign, and to live surrounded by mostly helpful infrastructure. Delving further into the concept of economic growth and prosperity, we easily recognize the value of labor-saving tools that have greatly increased our productivity. Vaguely, perhaps most can accept that paying too much of our hard-earned income to the state as tax works against our getting ahead. But facing cumbersome regulations starts to get too abstract to fully appreciate individually, let alone issues like inflation and restricting international trade and debasing our currency. All of these concepts become either too hard to understand, or maybe don’t even enter the mind. But they are real, and they do affect us all.
In the political arena where we all live, ideas and policies compete for votes. While growth and prosperity policies may be important to some, to others, receiving entitlements like Social Security and Medicare may be more important. And to still others, the siren call of socialistic goals may cloud the mind from recognizing where prosperity comes from. I will attempt to break through the clutter, and offer a framework to break this down into discreet packages, which may then become more understandable. So, instead of proclaiming that I favor growth and prosperity policies, I will share instead what such policies look like.
Generally speaking, a climate of freedom with healthy businesses in abundance and an able and healthy workforce in place would fit my description of the perfect economy. Then from this subtract all the negative forces that work against the ideal. John Tamny’s book calls these negative forces the “barriers to economic growth and prosperity,” and lists them as (1) excessive taxation, (2) burdensome regulations, (3) tariffs and decreased international trade, and (4) depriving money as a store of value.
Laffer approaches the subject differently and emphasizes motivation of people, saying that the fundamental tenant of economics is that people respond to incentives. As a result, the policies most adept at achieving prosperity have to be consistent with basic human behavior. All economic policies fall into one of the four grand kingdoms of macroeconomics. They are (1) fiscal (comprise revenue and expenditures, and taxes, which should be as flat as possible, and applied to the broadest base possible), (2) monetary (the purpose of which is to provide a stable, valued currency, and the Federal Reserve should operate on a price rule whereby reserves should be added to the banking system when prices are under downward pressures, and should be taken out of the banking system when prices face upward pressures. Spot commodity prices, interest rates, and the price of gold are good indicators of inflationary pressures. Decisions should be made in a purposeful, deliberate way devoid of erratic rapid change.), (3) trade (the basic rule should be free trade of goods and services and capital flow across international borders should be the goal), and (4) incomes policy (a catch-all phrase for everything not fitting into the first three kingdoms; rules, regulations, government restrictions, and requirements like a minimum wage, wage and price controls, and healthcare reform).
In the following chapters, I shall address taxes, regulations, trade, and stable money. To finish out this chapter, let me broach the subject of how to think of the health of our economy. We are accustomed to look to the GNP (Gross National Product) or the GDP (Gross Domestic Product) number, and whether it is increasing year over year or not to get an idea about the health of the economy and whether it’s growing.
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nbsp; Any measurement of anything may have its problems, so it may be that the GDP number is not perfect for judging the economic health of a country, but it does give a starting point. I offer the next paragraph merely to show where this number came from, and some of the criticisms of this number.
The Department of Commerce coined the phrase The Great Invention in the 1930s, “which by the end of the 20th century was celebrating GDP as a wonder of modern man, or at least of modern government. Global economies were growing, and counting growth did not seem controversial.” This is from a review by Rodger Lowenstein of Ehsan Masood’s book, The Great Invention. Among other criticism, he says this measurement “is flawed because the monetary value of all goods and services produced in a country makes no reference to social well-being or inequality.” Further, it “fails to consider environmental damage that is, at times, a byproduct of growth. It doesn’t, moreover, value household work or volunteering. Finally, it is silent on important noneconomic yardsticks such as health and literacy. …The question is not whether GDP is a flawed yardstick, but how to improve it.” Masood then quotes others on this subject who want to account for literacy and life expectancy. Some think that for poor countries, a measurement of how many people wear shoes might be a better measure. In richer countries, people can afford better healthcare, and better healthcare and education lead to more economic growth. Finally, “since GDP counts the value of what people pay, it leaves out free software and internet searches. It underestimates the enormous variety of modern capitalism but overestimates financial services. While critics suspect GDP overstates growth, (Mrs. Coyle) thinks it probably understates it.”
My main problem with the GDP number today, at a time when the national debt has exploded in the last few years, is that the GDP number may have an increase, but the increase may be negated by the debt increasing at the same time. Therefore, I would favor a debt adjusted GDP, and since we’ve gone through periods of high inflation with surely more to come, further adjustment for inflation would seem appropriate. Though the latter is probably going too far, here’s another way to look at the country’s economic health: calculating the national wealth.
This might work similarly to individuals writing up their personal financial statement; that is, stating income and assets, which is just like a company’s income statement and balance sheet. The balance sheet is a listing of assets and liabilities with the difference being the net worth, equity, or book value. This is always at a point in time. Complementing the balance sheet is the income statement of revenue and expenses with the difference being the net income. This is always for one period of time. Unspent income that accumulates from one time period to another gets added to the assets (or deficits to debt).
One could use a similar approach to evaluate the economic health of a country. Here, the balance sheet might list the assets of land, natural resources, education of the workforce, and accumulation of capital goods that are used by the workforce to produce credit in the real economy. That is,actual resources such as tractors, cars, computers, buildings, and labor. Then subtract the debt. The difference then would be net worth. The income statement would then be the sum of all the population’s income, which would be both reported and unreported income (from barter and illegal activity). From this number, subtract expenses which not only include the cost of government (government can only spend what it extracts from the real economy) and the expense of inflation (if not an expense, where should it go?). Looking at the country’s financial health is thus more than merely studying the GDP. I would have to say that more and more, a listing of GDP gets related to the amount of debt, but inflation is always ignored.
For what it’s worth, Warren Buffett wrote an op-ed in 2003 on the mounting trade imbalance, and made an estimate of national wealth. “To put into perspective the $2.5 trillion of net foreign ownership (in the U.S.), he contrasted it with the $12 trillion value of publicly owned U.S. stocks or the equal amount of U.S. residential real estate or what I would estimate as a grand total of $50 trillion in national wealth.”Thus, I’m not the only one thinking about national wealth.
I have written separate chapters for debt and inflation because they bear heavily on our country’s financial health. National debt reflects the cost of wars, the annual cost of the government’s deficit spending, and the cost of programs like Medicare and Social Security which last a span of years, and which Congress has given no thought as to how future costs will be paidfor. These are called “unfunded liabilities,” and in the U.S.’s future, these are huge. If you think the federal debt now approaches $20 trillion, think again. With unfunded liabilities, the number is closer to $200 trillion. Obviously, that debt is unsustainable, and either the United States government collapses, or change must occur. The hoped-for changes necessary are the focus of this book.
Inflation can be ended when the country gets back to operating under the discipline of a gold standard. Hence, I’ve written a chapter explaining what this is and how it works, but basically, operation under a gold standard would work like this: for Congress to spend more than the government takes in as revenue would lead to an increase in the rate of interest. In this scenario, as the interest rate climbs, the electorate will at some point be fed up with the pain that high interest will incur, and the public will demand that Congress put a stop to it.
The nature of debt is that it will always be with us, and the logical thought here is how to manage it appropriately. Over time and through economic growth, increased revenue from the economic growth will come, and this will start to reduce the debt. Hence, I’ve written a chapter on debt, but suffice it to say here that it is more important to reduce the cost of government, rather than to merely raise revenues. This is because raising revenues impede the creation of new wealth from which money is extracted to pay off, or at least stop the accumulation of more debt. Thus, let the half of the electorate who wish to reduce the size of the government, which never happens, and change this mindset to getting a more efficient and less wasteful government by ending duplication of services, and services no longer serving the national interest.
9 - BARRIERS TO ECONOMIC GROWTH
1. EXCESSIVE TAXES
It is axiomatic that government cannot create any value, just debt. The more that government takes from the workers in the private economy, the less wealth there is. Only private individuals can create wealth by working, earning, saving, and investing. The government does produce services, and many of us would agree that many finda lot of these services worthwhile. I’ll argue about the entitlements in other chapters. Certainly, there are legitimate reasons we have a military and some infrastructure for things like highways which couldn’t be built without the government’s ability to gather straight stretches of land through eminent domain. But economic growth and prosperity can only be created in the private, non-government side of the economy. And taxes impede economic growth and prosperity.
That taxes are high in the U.S. is not debatable. Whether we have the highest taxes in the world may be debatable, but when comparisons are made to Europe, and especially to the Scandinavian countries, their taxes include healthcare, and ours don’t. However, when healthcare is added, I submit that U.S. taxes are probably the highest in the world. If we add in state taxes, our total tax bill is miserably high. Both Republicans and Democrats have been complicit in creating this mess. Democrats have taxed and spent, Republicans have raised taxes attempting to balance the budget, and occasionally, Republicans have caught the same spending disease as the Democrats. This has gone on at both the federal and state level.
State and local taxes.I’m going to suggest a tax regime for the federal side that could maximize growth and prosperity for all, but will first offer a suggestion for how to approach state taxes where it has run amok. It would be unwieldy and impossible to make a plan for the states and then try to convince the citizens of the 50 states to make reforms, state by state. Instead, I figure some state will eventually get into such a financial bind that
it will be forced to have the governor run to Congress and ask for a bailout. This might be Illinois, but it could easily be Connecticut or California. Of course, the federal government is already broke, but it can print money, and the states can’t. The big drivers of excessive state spending developed like this: consultants approached local government telling them to raise salaries of the employees before they leave for the next town, or go into the private sector earning more and you’ll be left with no sanitation department or whatever. City councils and county commissioners tried to oblige, but facing re-election, hid a lot of the salary increases as greater retirement pensions to be paid in later years, and off-budget. Then unions for police and firemen got into the act, and the same happened. So far, this could have been managed, but then unions developed for government employees, like workers in City Hall other than police and firemen. (I’ll cover school teacher unions elsewhere). These public service unions represent government workers whose salaries derive from the taxpayers. Now, I don’t think anyone today would grumble about a guy operating a bulldozer who is represented by a union in the private sector, but what about a worker living off the public till his union can then campaign to raise his taxes? And of course, we’re always sympathetic to our police and firefighters, so we want to make exceptions for them, but what about office workers in City Hall?
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