America Needs Structural Reforms

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WASHINGTON – There is no doubt that millions of Americans are economically worse off because of the negative impact of a couple of global trends. First of all there has been the Asian awakening.

The impact of cheap labor

This translated into hundreds of millions of able-bodied Asian workers who almost suddenly joined the global labor pool, while offering their services at a fraction of the cost of their US and European counterparts. A lot of additional cheap labor supply, with no significant additional global demand for more goods, simply depressed the wages of US workers, while causing many US businesses to literally shut down, or move to low wage Asian countries.

Technology kills jobs

This is bad enough. But there is more. In the past, the effect of new technology was the creation of new sectors. The introduction of mass industrial production at the beginning of the 20th Century created millions of factory jobs, just as modern farming allowed food production with very few farmers, this way creating labor redundancies in the country side.

But now it is different. Now, advanced industrial technology means mostly automation. And this means that robots rather than humans make stuff. The factory of the future will be run by machines with only a few highly specialized humans at the controls.

This means fewer and future factory workers, regardless of demand increases.

Pressure on the US middle class

All this is enough to describe the plight of a huge portion of the American middle class. Jobs disappeared or pay a lot less, because US wages have to compete with the lower wages of Asian workers willing to do pretty much the same jobs at a fraction of the labor cost. At the same time technological progress killed other functions that now can be performed by machines.

Regain competitiveness

The only possible –but by no means certain– way out this is to regain global competitiveness by redoubling our efforts in innovation. We have to create new technologies, new systems, new products that will allow our corporations to lead.

This is not at all simple. Still, as a minimum, let us stipulate that public policy needs to be aligned with this paramount strategic objective of fostering innovation. But let me be clear on this. Good public policy is no guarantee of an economic renaissance. However, for sure bad public policy will hinder it, or prevent it altogether.

So, what is good public policy for America?

Here is my list.

The to do list

1) We need a vastly simplified federal tax code that will eliminate all tax loopholes, while reducing tax rates. What we want is a pro-growth tax code that encourages easy compliance, without discouraging business formation and new business investments.

2) We need a dramatic reform of all entitlement programs. We simply can no longer ignore the fact that all major entitlement programs (Social Security, Medicare, and Medicaid) were designed in another era, with vastly different demographics, and significantly lower costs.

3) We need a dramatic reform of the entire US public education system. The facts are known. US public schools, often at a very high cost, deliver a mediocre and at times horrible product. The impact of bad public education is immense. First of all, it creates an almost insurmountable obstacle to social mobility. The poor disproportionately depend on public education to get the skills that will allow them to advance in the American society. And, secondly, a smaller pool of educated people will make it a lot more difficult for America to become once again an innovation leader. Functionally illiterate high school drop-outs rarely turn into leading inventors.

4) And, yes, we should have sensible immigration reform. Make the borders secure. Create a path to legalization for most of the illegals who are here, and make it a lot easier for ambitious, smart people to come here and start a business. Let’s start with the capable people who are already here as graduate students in leading American universities. We educate them. Let’s give them a chance to stay and work here, if they so wish.

Health care is a mess

To this agenda  we should also add serious health care reform. But this is so complicated that I hesitate to place it on my wish list. Simply stated, by creating a system that is a horrible hybrid between private and public, with perverse incentives for doctors to over treat, and no financial reward for teaching prevention and “wellness”, we have created a real  monster. And so, we got the worst of everything: astronomic costs, (the US spends 17.5% of GDP on health), millions of Americans affected by (preventable) chronic diseases, and mediocre health care.

Plenty to do

Anyway, there is plenty to do. However, it will be difficult to hear clear calls for true reforms coming from the crowded field of would-be presidents. And this is a real shame. What I outlined above should be a pretty straightforward, non-partisan, to do list.

And yet our politics have become so ideological and vicious that we have done essentially nothing to advance on any of these issues for more than a decade. Between Bush’s foolish wars and Obama’s sterile populism, we have wasted precious time, not to mention trillions of dollars.

Focus groups policies

And now the risk is that the next president will be elected on the basis of what focus groups want to hear, (usually more benefits and lower taxes), as opposed to what needs to be done.

 

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