By Jerry W. Thomas

The U.S. economy, the greatest the world has ever known, is slowly losing its prowess.  Economic growth rates are gradually slowing, decade by decade.  Debt is piling up, as companies, individuals, and the U.S. government use “borrowing” to help maintain the illusion of economic progress.  The “borrowing” game is nearing its end.  The U.S. faces the threat of prolonged economic decay during the 21st Century, as it struggles to pay down debt, balance budgets, and fund investments for the future.  If the U.S. economy only grows one or two percent annually in real terms, the economic future of the U.S. will be grim indeed.

But, what if the real growth rate of the U.S. economy were four percent, or five percent, a year on average?  The U.S. budget could easily be balanced.  The total debt level could be paid down each year.  Major investments for the future could be made, and the U.S. would easily maintain its world economic leadership.  High rates of economic growth would eliminate unemployment, raise living standards, improve the nation’s health standards, and help fund a strong military to protect the U.S. from foreign threats.  Rapid economic growth could extricate us from the mess we have created for ourselves.

The economic solutions proposed by the major political parties offer little hope.  Politicians, for the most part, do not really understand economics or how to create a rapid-growth economy.  There are no simple, easy solutions.  No sound bites.  We need the best thinking and the hard work of everyone in the U.S. to build a high-growth economy.  Here are some ideas about how we might be able to build and sustain a high-growth U.S. economy.

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Foster Competition in Every Nook and Cranny of the Economy.

Businessmen love nothing better than a monopoly (despite their public speeches to the contrary).  Unions love to create labor monopolies.  Governments love little monopolies; government-granted monopolies and economic protectionism are such wonderful ways to transfer spoils to their political supporters and cronies.  In fact, almost every organized group in our society (and indeed in every society around the globe) strives to create its own monopoly or protected enclave to avoid the ill winds of competition.  Virtually no company or organized group really wants any competition.  Competition puts the company or organization at risk; its economic wherewithal and survival are constantly in peril if competition is allowed to roam unchecked.  No business or organization, it seems, is actually in favor of competition.  So, what’s the problem?

The problem is that every little monopoly, quasi-monopoly and governmental protectionism (and these are legion) reduce economic efficiency, slow economic growth, and reduce the average income of every U.S. household.  No one individually benefits from direct competition, but all of us collectively benefit from a competitive economic system. If economic well-being and economic growth are the goals, then governments should nurture, promote, expand and protect competition.

Governments must create “markets” and regulatory regimes that stimulate and encourage competition wherever possible throughout the economy.  It will take decades to find and abolish all of the little protected enclaves and quasi-monopolies in our economy, where governments, individuals, unions, and companies are shielded from competition. Without the stimulus of free competition and fair markets, there can be little real, permanent economic progress.

Make All Markets Fair and Transparent.

Think of a sporting event (like basketball, baseball, football).  The boundaries are clearly marked.  The rules are published for everyone to read, and the rules apply equally to all players on all teams. Referees and umpires enforce the rules (i.e., similar to the proper role of governments). And, by the way, the game is played out in the open for all to see.  It’s totally transparent. All markets should operate like a basketball game, or a baseball game. Honest, transparent, fair markets are capitalism’s greatest engines of economic progress. Regulation of these markets is essential and productive, so long as regulation follows the sports model. Unregulated competition doesn’t work too well, as Prohibition taught us in the 1920’s, and as the drug wars in Mexico are teaching us today.

Promote Free and Fair World Trade

The world economy is a market, and should be optimized in the same way that sporting events are optimized—with free, fair, and transparent competition.  World trade is best promoted and encouraged via trade agreements like NAFTA.  These agreements set forth the rules of the game, and are mutually agreed to by the participating countries.  The trade agreements also incorporate mechanisms for enforcement and resolution of disputes.  Typically, all participating countries enjoy higher rates of economic growth because of the efficiencies and productivity improvements created by trading.  Wait a minute, some would say.  What about China selling us goods worth $300 billion a year more than they buy from us.  Isn’t China waging economic war on the U.S.?  What about Mexico?  They sell us a lot more stuff than we sell to them.  Isn’t Mexico waging economic war on the U.S.?  An example may help us understand.  Let’s suppose we bought $500 billion of steel from China each year, and sold China $200 billion of agricultural products (a trading deficit of $300 billion).  At the end of the year, China would have 500 billion in U.S. dollars, and the U.S. would have $500 billion worth of steel.  The U.S. would have $200 billion from China, and China would have $200 billion worth of U.S. corn, rice, and wheat.  So, who has taken advantage of who?

Reform the Patent System.

Either eliminate all patents as barriers to competition, or make patents very narrow and specific.  As presently conceived and operated, the U.S. Patent Office primarily assists large companies in achieving and maintaining monopolies or quasi-monopolies.  Small companies cannot afford to seek patents or to defend patents in court.  The current Patent system helps protect monopolies and provide a playground for patent trolls.  In most instances, the Patent system actually reduces competition.  If retained, the patent system should be focused narrowly on physical, technical improvements of substance and importance, not on trivialities and certainly not on process patents.  One could easily build a plausible case that all Patents should be completely eliminated because they are barriers to competition.

Reduce Mergers and Acquisitions.

Enforce the Sherman Anti-Trust Act.  Mergers and acquisitions are leading to greater concentration of power (i.e., more monopolistic, more bureaucratic) in industry after industry.  Greater concentration leads to lower employment in an industry, higher prices, reduced service levels, and less innovation.  Monopolies don’t need to innovate or provide great service.  Mergers and acquisitions (if too many and too fast) tend to reduce competition, are disruptive to the economy, and can lead to productivity declines in many instances.

Phase Out Housing and Real Estate Subsidies.

The U.S. government supports the housing industry to the tune of hundreds of billions of dollars a year.  The interest on the home mortgage is a tax deduction.  Gains on the sale of one’s home are subject to favorable tax treatment.  The U.S. government guarantees home mortgage bonds.  These subsidies helped create over-building in the housing industry and laid the foundation for the financial collapse of Freddie Mac, Fannie Mae, and the financial meltdown on Wall Street in 2008.   While the support of housing seems like a good and wonderful thing, as we envision happy little children playing in their sun-lit backyards, the truth is quite the opposite.  Those little bright-eyed children face a less promising future because of all the money squandered by the U.S. government on the housing industry.  When the government showers an industry with money and favors, the final result is predictable: over stimulation of output, followed by collapse and financial disaster.

Phase Out Agricultural Subsidies.

What is the justification for subsidizing agriculture (farm subsidies are a worldwide phenomenon)?  The wholesome goodness of supporting little family farms appeals to the pastoral visions in our minds.  Won’t government subsidies and government protection support these little farm families, increase the output of food, and lower the cost of groceries and eating out?  Are happy farm families and low cost food good things?  Yes, if the goal is to create more people, and especially more fat people (that’s one of the hidden by-products of food subsidies).  Yes, if the goal is to create wealthy farmers who contribute to the election campaigns of their congressmen.  Farming is a business like any other business.  The ending of subsidies would lead to a more robust agricultural sector, more crop diversity, and greater productive efficiency.  There’s no reason to waste money on agricultural subsidies.

End Tax-Free Municipal Bonds.

The U.S. government’s grant of tax-free status to the bonds of states, counties, cities, school districts, and other “governmental” entities is a massive subsidy. It encourages excessive borrowing and spending by governmental and quasi-governmental entities.  It provides an incentive for states, counties, and cities to undertake marginal projects. Tax-free bonds from governmental entities are used increasingly to finance private ventures, another reason to end the practice. Billions of dollars of taxpayer money are wasted by giving state and local governments a tax-free ride.

Tax All Churches and Charities.

Now, taxing the “good guys” might seem counter-productive and ill advised.  Don’t we want more “do gooders” in our society?  Don’t we want people to go to church? Don’t we want more charities out helping the poor and the disadvantaged? These are businesses, too, although they wear sheep’s clothing. Apply GAAP accounting rules to all churches and charities, so that churches and charities pay taxes on their “profits” like other businesses. If we are soft hearted, perhaps the tax rates for churches and charities are lower than the corporate rates. We might also want to eliminate or minimize income-tax deductions for contributions to charities (this is another subsidy to church-charity industries). This is a tough one.

Lower the U.S. Corporate/Business Tax Rate.

The U.S. corporate income tax and related business taxes should be lowered to a rate comparable to the largest and best economies in the world (probably around 20 percent to 25 percent). Corporate income taxes are hidden sales taxes on the general public, and as such are regressive in nature. Reduced corporate taxes would free up money for investments in business expansion, research and development, and new products and services. Reduced taxes would provide incentives for corporations to keep operations and business units in the U.S and would encourage foreign companies to locate business units in the U.S. To the extent possible, these corporate tax rates should be coordinated by the world’s major economies to be as comparable as possible across countries.  The greatest risk of reducing corporate taxes is the likelihood that corporations would use the money to boost executive salaries (already massively inflated).  The reduced corporate taxes might need to be protected by limits on corporate salaries, bonuses, and stock options.  That is, if executives abuse their power, the corporation has to pay higher tax rates.

Eliminate U.S. Taxes on Corporate Earnings Overseas. 

Currently, the U.S. government double taxes U.S. corporations that earn money in foreign countries.  The corporations must pay taxes required by the foreign country, and then pay taxes again on the same earnings when they try to bring the money back to the U.S.  This double taxation results in U.S. corporations reinvesting their money in foreign countries, rather than bringing the money back to the U.S.

Eliminate Double Taxation of Dividends.

Individuals who own Stocks have to pay income taxes on the Dividends, and Companies have to pay taxes on the income before paying out the Dividends.  Companies should be able to deduct dividends in the same way they deduct interest payments (i.e., as a business expense).  Treating Dividends like interest payments could make it easier for small companies to issue stock and pay dividends to investors, and thereby increase the flow of capital to small businesses.  Large companies might be more likely to pay dividends, if those dividends reduced their income tax obligations, and higher dividends would help provide a “floor” under stock market prices.

Make U.S. Households’ Income Taxes More Progressive.

That is, tax higher income households at progressively higher rates.  Too much of the tax burden is borne by low and middle income households.  All income over $250,000 in a given year should be taxed at higher and higher rates, and possibly reach levels of 50% to 80% for incomes over $1 million.  Too much money flowing to wealthy individuals reduces demand for the broad spectrum of consumer products and services that keep an economy humming.  Some of the wealthy deserve their high incomes by virtue of their contributions to the economy, but many just happened to be in the right place at the right time.

Keep Sales Taxes.

Tens of millions of U.S. residents pay no income taxes, because of tax avoidance and “cash” black markets.  Almost everyone pays sales taxes, however, so keeping sales taxes and expanding to more product and service categories improves the chances that everyone pays at least some taxes.  True, sales taxes tend to be regressive, but we can offset this by more progressive income taxes.

Raise Interest Rates.

Raise interest rates in steady progression to more reasonable levels from today’s low rates.  Higher interest rates put pressure on firms, governments, and individuals to reduce debt, and force everyone to use credit (capital) in more efficient ways.  Higher interest rates would likely reduce commodity prices and minimize speculative bubbles—and these savings would be stimuli to the world economy.  Higher interest rates would help keep inflationary pressures under control.

Eliminate or Minimize Inflation.

The planned annual inflation rate of 2% or so pursued by the Federal Reserve (and the central banks of the world) is believed to be an “economic growth” guarantee.  Inflation tends to stimulate spending, the reasoning goes, because consumers will want to transfer money into products and services—before the money loses its value.  Central banks greatly fear that deflation, on the other hand, would discourage consumer spending.  The reasoning is that consumers would stop spending—while they wait for prices to go even lower.  Central bankers’ fears of deflation are based on mythology.  So long as inflation and deflation remain within a 2% to 3% range per year, the effects on the economy will be minimal (extreme inflation or deflation is another story).

The central banks’ planned inflation of ~2% a year simply steals money from those who save and invest.  The long-term goal should be zero (0) inflation, not 2% a year.  A highly stable dollar would contribute to overall economic efficiency by minimizing the economic distortions caused by inflation.  A stable dollar would lead to better decision-making in corporate America and in Washington, D.C.  A stable dollar would encourage foreign investments in the U.S.

Legalize Drugs.

We could save billions and billions of dollars a year on law enforcement, prisons, courts, and governmental bureaucrats by simply legalizing and regulating the production, distribution, and marketing of what are now illegal drugs.  New tax levies on the production and sale of drugs could generate billions in new revenues for the U.S. Treasury.  Part of the money thereby generated should be devoted to educational efforts and treatment programs to prevent drug abuse and drug addiction.  We need to think of drugs in the same way we think of alcohol.  Make it legal.  Regulate it. Tax it.  Fight it with education and rehabilitation.  Prohibition is not a viable strategy, as history has shown us.  Let’s convert a financial drain on our country into a source of income.  Let’s remember addiction is a disease, a health condition, not a justification for incarceration.

Reform Healthcare.

The efficiency of the U.S. economy is at risk, if healthcare costs continue to rise.  The U.S. spends a higher share of GDP on healthcare than any other major county in the world.  The first line of attack should be prevention.  How can we reduce obesity?  How can we encourage better diets and improved nutrition?  How can we encourage more exercise?  How can we reduce smoking, excessive drinking, drug overdoses through education and incentives?  How can we reduce automotive accidents?  How can we improve mental health?

How can we stimulate greater competition in the healthcare industry, to bring to the fore more innovative and cost-effective solutions.  Reducing barriers to competition, wherever feasible, is an effective way to reduce healthcare costs.  For example, permitting nurses and pharmacists to prescribe some medicines, and permitting more “over the counter” sales of some medications could reduce healthcare costs.  Expanding treatment by nurses and physicians’ aides, and saving the more severe cases for the doctor, could reduce healthcare costs.  Governmental incentives (i.e., competitions for private individuals and companies) to stimulate the development of more cost-effective medical solutions (for example, more vaccines) are worthwhile.  Providing healthcare to everyone is a sound investment in the future.  Sick children and sick adults don’t contribute much to economic productivity.

Invest in Education.

During the 1800’s, the U.S. invested massive sums of money into creating educational opportunities for all children through grade 12, and laid the foundations for widespread higher education through the Land Grant Colleges (starting in 1862).  These huge educational investments set the stage for the U.S. to dominate the world’s economy for much of the next 150 years.  That dominance is very much at risk.  Many other countries are now out performing the U.S. in educating their youth.  Also, the rising costs of attending colleges and universities in the U.S. will ultimately inhibit the pursuit of higher education.  The U.S. spends huge sums on education, but does not get optimal returns on its investments.  Bring more competition into the educational system at all levels. Competition among schools could spur educational improvements and promote educational efficiency.

Provide Incentives, Allowances, and possibly Subsidies for Childcare.

Making it easier for lower income men and women to work is a good investment in America’s future.  It also would provide a protected, safe environment for children to be nurtured, coached, and educated.  The goal is to give every child and every brain the opportunity to make a contribution to the overall economy and the overall good.  Much better to invest in our children—than invest in prisons.

Raise Energy Prices.

From 1900 to 2000 the world enjoyed a century of virtually free energy, a gift from the gods in the form of inexpensive petroleum.  Never before in human history has the real cost of energy been so low.  But the 21st Century (2000 to 2100) might see the real cost of energy rise, as it becomes more and more expensive to extract petroleum and develop alternative sources of energy.  Given the future probability of higher energy costs, let’s gradually raise the cost of energy now through taxation—to force ourselves to face up to and address this looming economic problem.  Higher energy prices would encourage improvements in energy efficiency across the broad U.S. economy and would stimulate investments in all forms and types of energy production.  A more fuel-efficient economy is a more productive economy.  More diverse sources of energy would provide future insurance against catastrophic disruptions in energy supplies.

Reduce Car and Truck Speed Limits.

Even a small reduction in average automobile and truck speeds would reduce fuel consumption and improve safety.  Money not spent on foreign oil can be used to buy groceries, or build new schools.  Money not spent on hospitalizations and funerals can be used to build new research laboratories.  Place “governors” on all automobiles so that they cannot exceed a specified speed.  That would save billions of dollars in fuel costs each year, and reduce expenses and medical spending related to car accidents.

Raise Capital for Small Businesses and Small Entrepreneurs.

Small businesses are more creative, more inventive, and more entrepreneurial than large companies.  Most small businesses (less than 500 employees) are typically under-capitalized and have few options for raising money—without giving up ownership of the business.  Right now, any business smaller than $300 to $500 million in sales is largely blocked from an IPO (initial public offering) by legal expenses and regulatory burdens.  How could we create capital markets for small businesses?  True, these “small business” markets would be exceedingly risky for investors and difficult to monitor and regulate, but the return-on-investment for the overall economy could be enormous.  This would take a lot of trial and error, and a lot of experimentation to come up with the best systems, but the payoff would justify the effort.  More capital for small businesses and small entrepreneurs would be an engine for economic and employment growth.  Small businesses create most of the new jobs in the U.S. economy.  The U.S. has taken “baby steps” in this direction, but could we do more?

Raise Inheritance Taxes.

One way to keep the rich from getting richer is to have very progressive inheritance taxes.  Sure, let wealthy individuals transfer a few million dollars to their offspring, but not hundreds of millions.  We want an economy based on hard work and merit, not how much money someone inherited from mom and dad.   This strategy tends to level the playing field, so that each generation has to work hard to be successful.

Provide Incentives for Energy Conservation.

The simplest way to achieve this goal is to systematically raise the cost of energy through taxation.  This would need to be phased in slowly, to avoid triggering recessions.  Since some sources of energy are more damaging to the environment than others (i.e., have differing hidden future costs), these differences should be reflected in the comparative tax rates.

End Corporate Corruption.

We need a whole new body of laws dealing with the responsibilities and obligations of executives of public corporations.  No one ever envisioned that senior executives would steal money from shareholders and employees, by paying themselves king’s-ransom salaries.  So many corporate buyouts and leveraged buyouts result in the senior executives of the acquired companies walking away with tens of millions of dollars.  It’s analogous to the governor of Texas selling Texas to Mexico and pocketing a payoff of $30 million.  These types of corrupt buyouts happen weekly, and instead of putting the miscreants in jail, the executives get featured on the cover of Business Week as heroes of capitalism.

Minimize Spending in Public Sector.

Over the last hundred years or so, more and more of U.S. Gross Domestic Product (GDP, or total spending) has been accounted for by governments (federal, state, and local), while the share of the U.S. economy accounted for by businesses and non-governmental organizations has diminished.  As we spend more and more money on governments at all levels, the efficiency of the U.S. economy wanes, because governmental spending is not as productive as spending by private businesses and private organizations (in most instances).

Invest in Value Creation Industries.

Some industries are more important to an economy in terms of value creation than other industries.  All other factors being equal, the U.S. should encourage investment in these value-creation industries (or at least not discourage such investments).  Manufacturing tends to be a high value-creation industry; farming is a high value-creation activity, as is software development, mining, education, and pharmaceuticals.  Government bureaucracies, on the other hand, tend to be low value-creation enterprises, and may indeed result in negative value creation.  Large corporate bureaucracies tend to have many of the same problems as large governmental bureaucracies (hence, enforcement of the anti-trust laws).

Balance the U.S. Budget.  The annual budget of the U.S. must be balanced.  It will take 5 or 6 years to reach this goal, but reach it we must.  If we try to go quickly from a trillion dollars or more a year in deficit spending to a balanced budget, the result will be a major recession.  Our economy can probably survive $200 or $250 billion a year in deficit reduction without creating a recession.  If we are on track to balance the U.S. budget, it will send a positive signal to the world’s financial markets, and encourage foreign investment in the U.S. and the U.S. dollar.

Pay Down Debt.

U.S. debt is a ticking time bomb.  If interest rates begin to rise sharply (as they surely will at some point), the result will be untold economic hardship on the U.S.  As soon as the U.S. budget is balanced, the next step is to begin a slow-steady pay down of the debt.  Slow to avoid recessions, but steady to boost confidence in the U.S. and the U.S. dollar.  If the U.S. were shrinking public debt as a percent of GDP (unlike most countries), investors the world over would be moving money into the U.S. economy.

Protect the Environment.

We only have one earth, one home.  We must strive every day in every way to minimize our human footprint on our planet’s natural environment.  This means eliminating pollution of all types, recycling of all resources, and carefully measuring and monitoring the effects of our actions on planet earth.  We must protect and preserve the natural ecological systems that sustain life on earth and protect human health.  Careful and efficient use of the world’s limited resources, with massive re-cycling, can contribute to economic productivity in the short-term and to survival in the long-term.

Final Thoughts

We can create a high-growth, sustainable economy in the U.S.  It will take decades of thinking, diligence, creativity, enlightened leadership, and an emphasis on competition and efficiency.  Let the ideas flow and the debate begin.  We have nothing to lose but our deficits, debts, and stagnation.  Let’s go to work!