The Economy Needs an Overhaul, Not Just Tinkering

Following last week’s abysmal economic reports, particularly the May Employment Situation Report, there’s a lot of hand-wringing among policymakers and economists.  Why isn’t the economy responding to the Fed’s low rates and QE2?  How can Washington do more about jobs without further worsening the already-too-high national deficit?

As in my prior post pointing out that the Fed could do a lot more than just setting rates and running QE2, I think Uncle Sam could also do a lot more than just throw money around.  But most of the people commenting seem to be locked into the two prevailing political dogmas, and don’t seem to be thinking creatively about the options.  It might take some leadership to break through the political logjam, but isn’t that what elected leaders are for???

Typical framing of the issue is highlighted in a recent post by DeLong – both parties appear to have “prioritized deficit cutting over job creation and full employment”.  However, like the Greek and Japanese economies, the problems with the U.S. economy are much deeper than “lack of jobs” vs. “excessive deficits”.  The problems are structural and we need an overhaul, not just numerical tinkering with budgets, tax rates and Fed policy parameters.

We need to step back a bit and ask what, as a nation, the United States is all about?

Viewed holistically, we are a nation of 300,000,000 people, of which some are working, some are too young or too old to work productively, and some could be working, but aren’t.  Right now, too few are working, more are becoming too old to work (though some are retiring before they should), and too many aren’t working who should be.

Of those who are working, too many are engaged in activities which don’t actually improve the nation as a whole.  We could probably create a national situation in which there was gainful employment for all who wanted it, but we need massive institutional reforms across much of the scope of government.

Among many examples, we might consider actions to (a) cut back on military and “homeland security” spending via institutional reforms, (b) reinvent the health-care delivery apparatus to streamline costs relative to outcomes, and (c) make it easier for the poor to get richer through hard work, while making it harder for the rich to get richer without working.

For (a), we ought to figure out why it costs $1,000,000/year to deploy a single combat soldier overseas, and cut the number in half — possibly without cutting back on the soldiers themselves.  That number speaks volumes about Pentagon waste.  For (b), we ought to figure out why the U.S. spends twice as much of it’s GDP on health care as its peer nations, yet gets no better results.  That number speaks volumes about medical waste, and examples are legion of pointless paperwork, frauds against the bureaucracy, and “treatments” whose cost-benefit equation is negative.  No doubt the health care costs could also be cut in half.  And for (c), we probably don’t need to raise marginal tax rates, we just need to streamline the tax and legal codes (to simplify financial decision-making, another huge source of wasteful economic friction) and make sure everyone pays fairly again.

None of this is easy, particularly because those profiting from the current culture of Federal waste will fight it tooth and nail, but together these actions could turn the U.S. current 10%-of-GDP deficit into a healthy surplus.  And they would free up a large fraction of the workforce to perform work that actually adds value to the country… not just adding statistics to “GDP”.

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