Rethinking our National Economic Model

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Rethinking our National Economic Model

By Paul Notari

June 14, 2010

The economic future of this country is fast becoming untenable.  The two principal causes are the large disparity in income levels between the wealthy and middle/poor classes, and the unprecedented growth of our national debt.  Both have reached alarming proportions and must be reversed if sustainable growth and economic health are to be maintained.

REDUCING INCOME INEQUALITY

Since our country was founded in 1776 we have operated under a set of economic principals that have stood us well for over 200 years and have made the United States the most prosperous nation in the world.   Despite occasional recessions, and even depressions, our citizens overall have realized a prosperous existence unlike no other nation in the world.  Our system, based primarily on free enterprise with little government interference, has wreaked unparalleled benefits for a large majority of our citizens.   No nation on earth has been able to boast of a higher standard of living for its population over the last century than the United States.

But things have changed. The income gap between our lower income and higher income earners in the United States has broadened immensely.  In the 60s, the U.S. income inequality gap was quite respectable, comparable to most modern nations in the world.  Today we have the largest inequality of any country on earth.  The latest data shows that in 2007 America’s top 1 percent of earners received 23 percent of the nation’s total income compared to only an 8 percent share in 1980.  In 2010 the difference has become much worse.

There are several factors leading to this large disparity in population incomes.  One is the loss of manufacturing jobs due to the off-shoring of much of our manufacturing base to foreign countries where labor is much cheaper.  This has eliminated thousands of relatively high paying factory jobs while, in too many cases, replacing them with much lower paying retail and service jobs.  The same is true for a great number of office jobs.  Companies who employed well paid American workers to answer customer inquiries and conduct other over-the-phone business transactions now use foreign services to do the same work at considerably less cost.

Other factors contributing to the loss of high paying jobs has been the automation of many formerly manual operations in offices and factories, and the replacement of some high-employment publishing enterprises (newspapers and magazines) with more popular internet services.  As such long-established pillars of our workforce are eliminated, fewer wage earners are employed and our national average middle class income diminishes.

Further we cannot discount the negative impact that the growing demise of unions has had on wages.  While admittedly unions imposed some unfair demands on American industry in the past, it cannot be denied that they did force companies to pay higher wages to their employees than they otherwise would.  As unions are no longer dominant in most American enterprises today average worker wages have not risen as might otherwise be expected..

Another reason for the widening difference in take-home incomes between the rich and the middle/poor classes is our income tax structure.  In decades back, the very wealthy in this country were taxed at a much higher rate than those earning less.  After the Bush tax cuts in 2003, the tax on the wealthy (now at 35% in the highest bracket) is considerably lower than it ever has been since WWII.  On the other hand, the middle/poor classes are taxed at relatively the same rate.

For the United States to retain its high quality living standards and maintain its status as the number one respected nation in the world, it must reverse the present inequalities amongst the ranks of its population and recreate a more level playing field for all of its people.

Revitalizing Our Manufacturing Base and Reducing Unemployment

For many years we have relied on our technical expertise and our manufacturing base to keep a large portion of our people employed at high salary levels. This is no longer true.  Currently, manufacturing accounts for only 11% of our GDP. This is particularly distressing since experts say that for a strong national economy the figure should never be less than 15%.   Keep in mind also that manufacturing also engages people in adjunct areas such as producers and suppliers of component parts, packaging and transportation of finished goods, and management.  When factories close down, thousands of these jobs are lost as well.

And it is the loss of these types of jobs over the last 30 years that has been the principal cause of our current national unemployment situation.  Too many high paying manufacturing jobs have been replaced by much lower paying jobs in retail and other non-manufacturing sectors.  If we continue along this path, most economists predict that ultimately we will become a nation almost devoid of an affluent middle class and be characterized principally by a majority population of low income poor.

So what is a sane solution?  We really don’t want to go back to leavening high tariffs on all imported goods to encourage more domestic manufacturing.  This would be a disaster in our relationships with all of our foreign trading partners and allies.  But on the other hand how can we compete with foreign manufacturers who underprice their goods based on an artificial undervaluation of their currency or special subsidies given to them by their government.  We must revamp our trade policies, at least to some extent, to compensate for such unfair competition.  Goods produced by foreign industries under these circumstances must be assessed an import tax accordingly.  If we are to operate in a free market, the market must be totally free.   The mother country currency undervaluation and the amount of government subsidy to an industry must by considered as part of the unit cost of the products it produces and must be figured into the final price that is charged.  If the price itself does not take these unfair trade practices into account, then an import tax should be assessed to compensate.

But enactment of such import taxes alone will not increase domestic manufacturing to the degree necessary..  What we must do is to concentrate our manufacturing base in areas that cannot be competitively replicated by foreign industries.  For example, the production of ethanol.  By redoubling or tripling the production of ethanol, we could add well over a million new jobs to our workforce.  And in so doing we would also dramatically reduce our dependence of foreign oil.  Further, by concentrating our efforts on the production of ethanol from cellulosic feedstocks, we would silence the objections of those opposing corn ethanol for food loss reasons.   Another example would be coal liquefaction; the process of producing gasoline from coal.  While to date the fuel produced is far more expensive than the market price of crude oil derived gasoline, the cost has been reduced appreciably over the last several years while the price of fossil gasoline has continued to increase.  The benefit here is the creation of many domestic jobs, both in the coal mining and the manufacturing industries, and the lessening of our dependence on imported oil. 

Another area where domestic manufacturing could well compete with foreign competitors is in the production of hybrid and electric automobiles which are destined to become the principal means of land transportation in the future.  The key to rechargeable electric autos is the lithium battery, which is also one of the most expensive components of the car.  The difficulty is that lithium is only found in ample supply in very few spots on earth; the principal sources being Bolivia and Chili (a possible new source could be Afghanistan where large deposits of lithium have recently been reported)..  Thus, an Asian auto manufacturer, in say China, Japan or South Korea, would have to import its lithium from the same sources and at the same price as we.  This would, of course, reduce their competitive edge.  These foreign manufacturers would also have to bear the cost of shipping their finished automobiles to the United States, which would be considerable.  All things considered, if U.S. manufacturers were to build new plants utilizing the latest innovations in manufacturing techniques, they should easily be competitive with foreign manufacturers in the production of hybrid and electric cars.

There are other areas where domestic manufacturing could match up well against foreign competitors.   Some that come to mind are the manufacture of renewable energy system components, medicines, processed food packages, building construction materials, and other items that can be economically produced in this country.  Overall, domestic manufacturers should be given special government support via tax incentives and federal purchases.  The goal must be to increase domestic manufacturing from 11% to over 15% of GDP.

Revamping our Income Tax Structure

In 2003 President Bush reduced the income tax burden on everyone earning $33,950 and above with the greatest decrease bring given to those earning in excess of $372,950.  Their tax rate dropped from 39.6% to 35%.  And this is now the maximum assessed on any taxpayer regardless whether they are earning many more times the $372,950 amount.  At one time our tax code was designed to assess citizen’s earnings in direct proportion to the amount of income earned.   The goal was to make sure that the more income people received the more tax they proportionally would have to pay.  In times past, the wealthiest U.S. citizens were taxed at a rate 5 times higher than the average middle class taxpayer.   Today it is only 2 times.

To more fairly distribute tax income between all levels of income earners, a new tax rate structure should be established.  These measures are described in depth in the next section.

REDUCING OUR NATIONAL DEBT/RESTABLISHING ECONOMIC SOLVENCY

The deficit for fiscal year 2009, which ended Sept. 30, came in at a record $1.42 trillion (this includes TARP and Stimulus funds spent during the year).  This brought our total national debt to over $12 trillion. Much of this stemmed from the large tax reduction enacted in 2003, the cost of the Iraq and Afghanistan wars, the upheaval in the financial markets that precipitated the massive TARP and Stimulus spending packages, and the government’s reluctance to take any remedial action during the Bush administration. To make matters worse, the trend appears to be continuing in these early months of the Obama administration.  If nothing changes, future annual deficits are projected to rise from $2 trillion to over $5 trillion in the next decade.  This would be catastrophic for the nation and could even result in a total collapse of our economy and our lead position in the international arena.

Without question, the United States has become fiscally irresponsible.  We are spending at an enormous rate while avoiding any measures that would increase our income.  Instead we are borrowing money from abroad on a horrendous scale.   We are on a path of national bankruptcy without any doubt.

But all is not lost.  We can still recover if we just take some available actions that could realistically bring our finances into balance.   Here are my suggestions.

1.       Impose a surtax on all U.S. taxpayers in direct proportion to our war expenditures.  Today the entire burden of our Iraq and Afghanistan wars is borne by our troops abroad, plus those foreign governments who are in effect loaning us the money to fund the estimated $139 billion in annual costs for both wars. Our citizens have never been asked to make a single sacrifice for the two wars in which we are presently engaged.  This is preposterous.  Never in our history has this country engaged in armed conflict without financial support by its citizens.  Not only is this unpatriotic, it is also one of the principal causes of our growing debt.  To remedy this, I recommend that we impose a temporary “war tax” on all citizens earning above the poverty level.  Our goal would be to collect additional income taxes each year in an amount equal to our annual war expenditures (this would amount to about $985 per taxpayer – there are approximately 141 million taxpayers).  The tax percentage increase for each tax bracket would be in direct proportion to the tax rate percentage graduations for each bracket currently in effect.

2.      Curtail spending on all federal programs.  The total outlay of federal funds in 2009 was aproximately$2,650 billion.  Of this, $1,449 billon was for military/defense expenditures and $1,201 billion for all other expenses.  Military/Defense expenditures include all military and homeland security expenses, veteran benefits, and an equitable proportion of the interest that we are paying on the national debt.  “Other expenses” include human resources spending, physical resource spending, government administrative expenses and the remaining interest on the national debt.  Without doubt much military/defense spending is being wasted on the procurement of goods and services that are unneeded or overpriced.  At minimum, a savings of 10% (approximately $140 billion) could be realized by more judicious purchases and better negotiation of prices with suppliers.  While I would hesitate to severely cut any of the human resources programs (e.g., Education, Health & Human Services, Food Nutrition, etc.), I believe we could reduce government administrative and physical resource programs (e.g., Agriculture, Transportation, Commerce, HUD, Etc.) by at least 10%.  This would net an annual savings of about $60 billion.  Overall we should easily be able to save about $200 billon annually by cutting federal spending as suggested.

3.       Remove the Social Security Tax Limit Entirely.  Today a payroll tax of 12.4% is assessed on all payroll income up to $106,800 to pay for social security expenses.  Taxpayers earning in excess of this amount pay nothing on the income they earn above this figure.  This is unfair in that high earners really pay no more tax than low earners.  If the limit was removed entirely, high income earners (and their employers sharing the SS tax assessment cost) would pay the same percentage tax on all of their income not just the first $106,800.   This could net the government an additional $85 billion per year.

4.       Rescind the Bush Tax Cuts of 2003 and Enact New Tax Rates.   In 2003 President Bush reduced the income tax burden on everyone earning $33,950 and above.  The greatest decrease was given to those earning in excess of $372,950.  Their tax rate dropped from 39.6% in 2000 to 35% in 2003.  By returning the tax rates to their 2000 levels, financial experts at the highly regarded Tax Policy Center have calculated that the federal government would receive an additional $30 billion per year in income tax revenues. .  In addition, new higher tax rates should be imposed on those earnings above $500,000; then again above $750,000, and yet again above $1,000,000. Further, the 2003 tax reduction legislation included a new provision that income derived from capital gains and dividends would be taxed only at 15%.  Since almost three-quarters of the highest earners income is from these sources, their income tax liability is reduced even further.  It is estimated that another $10 billion in tax revenue would be achieved if these earnings were taxed at the regular income tax rate.

5.      Enact fuel efficiency tax incentives.  Our massive import of crude oil is hurting our trade balance dramatically and is financing our middle-eastern enemies. In addition, the comparative low price of gasoline from crude oil is stymieing domestic job growth in alternative domestic fuel industries and is perpetuating the use of fuel inefficient vehicles.  By taxing crude oil derived gasoline, at say 50 cents per gallon, we would be giving strong incentive to car owners to use domestic ethanol, shale oil and other domestic produced fuels, as well as to convert from gas guzzlers to more fuel efficient vehicles.  As an added benefit, it would give us a very large new income source to help alleviate our debt.  By conservative estimates this would be about $70 billion per year.

6.      Tax American companies who incorporate offshore to avoid U.S. taxes.  In recent years, too many companies have incorporated in foreign countries, usually small island nations, in order to avoid paying U.S. taxes. Rarely do they have more than a dummy address in the foreign country, with few or no personnel located permanently there. This is becoming a more common practice every year.  By current law this is acceptable and millions of tax dollars are being lost.  This should not be allowed.  A law should be enacted whereby any corporation that has its principle administrative offices and operations within the U.S. should be subject to U.S. taxes regardless where they are incorporated.  If just 5% of all U.S. corporations have gone this route (a conservative figure), we could recover almost $19 billion in tax revenues by enacting laws requiring them to pay their regular tax.

IN CONCLUSION

If the United States is to retain a high quality of life for all of its citizens and continue to command a revered position as the economic model for all nations it must quickly reestablish economic equality amongst its citizens and reduce its national debt substantially.  To achieve this, the United States must revise its current economic model and pursue a new path such as suggested in the preceding paragraphs.

ABOUT THE AUTHOR…

Currently, Mr. Notari owns and manages a small firm, Scitech Communications, Inc, that specializes in publishing newsletters and technical documents devoted primarily to renewable energy.  He is the editor and publisher of CRES NEWS, the monthly newsletter of the Colorado Renewable Energy Society. Amongst his many achievements, he recruited top bio professionals to prepare the material for the textbook, Fuel From Farms, which he edited and published in 1980 for the Department of Energy.  The book, which was distributed to hundreds of potential biofuel entrepreneurs, is often credited with the launching of the ethanol industry in the U.S.

In 1992, Mr. Notari retired from the Solar Energy Research Institute (now the National Renewable Energy Laboratory) where he last served as manager of Technical Information Programs. He was employed there for thirteen years in various managerial capacities.  He served on the Board of Directors of the American Solar Energy Society (ASES) for several terms between 1991 and 2007.  In 1991 and 1992 he was elected Chair of the Society and in 2000 he was honored as an ASES Fellow.  In 1996 he, along with Dr. Ronal Larson, founded the Colorado Renewable Energy Society and served on its Board of Directors until 2003.  He has been listed in “Who’s Who in America” since 1976.