MEDFORD: Dear Mr. President-Elect: Congratulations on your electoral victory! You enter the office at a fragile and difficult time, and this letter offers thoughts on problems confronting the US.
The immediate problem is the near-collapse of the financial system and the recession we’re in right now. The temptation will be to continue throwing money at these problems, except that the country is already in debt and it’s not clear if fixing short-term crises does much to fix long-term problems. And, please remember that though the American people elected you, many others in the world care what you do – the family in Latin America that gets remittances from a relative working here cares, the African farmers who export food or factory workers in Asia. Although US power is far from absolute, US influence is great, especially on the world economy.
In the short-term, the housing market must be stabilized at a realistic price, about 10 to 15 percent lower than it is now. Write down the floundering mortgages to a little less than the houses are worth, insure the new paper – 30-year mortgages at about 6 percent – and give some of the future price appreciation to the government and the old mortgage owner. That will slow foreclosures and the bleeding of wealth that is killing consumption and the local property tax base. The old mortgage issuer, not the taxpayer, should swallow the cost of reducing the mortgage. For those who still lose their homes, see if some of the smaller foreclosed homes can fit their incomes. Or else help them find affordable rental units.
Offer to invest in healthy banks on terms similar to the deal that Warren Buffet made with General Electric. The bonds would be issued by the banks and pay 10 pay with an option to buy shares at a low price. That way, there are no subsidies and the taxpayer is paid for helping.
Easy money is not enough to quickly reverse this recession. Use deficit spending carefully. Give it as aid to states or cities to keep vital services going or for infrastructure investments. Extend the unemployment compensation period, but not permanently. Increase grants for community-college scholarships. Those uses will reduce hardship and build our productive capacity. The money is sure to be spent, too.
As we move out of the recession, higher tax revenues will not make enough of a dent in the deficit, which is getting to be a problem. So choices must be made. Start with health care. The US spends twice as much per person as Canada on health care and manages to miss more than 40 million people and has infant mortality double that of Slovenia. We should be able to cover everybody for what we now spend. Expect fights with health insurers, drug companies, the American Medical Association and hospitals. Use incentives to have provider groups cover families so if employers want to shift the burden it will be possible for families to be covered at a reasonable cost. This might save some factory jobs!
What about trade? First realize that if fringes are taken out, real take-home pay in 2008 is about where it was in 1987. Over the past 20 years with fringes in – mainly the over-priced medical insurance – workers have only gotten an increase equal to half of their productivity gains. They are suspicious of trade because they’ve not done well while trade has soared. Other factors, like automation, the decline of unions and migration play a bigger role, but are harder to fight. The only problem is a lot of the best jobs come from exports and if we repeat the 1930s, export jobs will evaporate. Anyway, as families start to borrow less and save more, our trade deficits will shrink. That’s desirable and should be encouraged. We were living beyond our means.
Another way to reduce imports sensibly would be to invest in energy technologies. Developing more efficient vehicles, whether hybrid/electric or diesel or natural gas powered, would reduce oil imports. Cheaper solar and other renewable sources would reduce greenhouse gases and help persuade India and China to cooperate. Even with cheaper oil and gasoline, it’s worth spending more on R&D and partly switching from taxing wages to taxing carbon. As gasoline consumption plummets, electronic tolls on interstate highways are needed, too. Don’t forget to upgrade the electric grid, which will wind power to be used more widely. That might be a deal with the farm states – phase out the corn ethanol subsidy, but give farmers rent from wind mills for better transmission networks. Other biofuels might prove cheaper anyway and compete less with world food supplies.
Even if we reduce medical and energy costs, we still have a budget deficit problem. Of course, during a bad recession, it’s a good idea to run a deficit. The problem is that large tax cuts and little spending restraint have built in deficits at all times. Meanwhile, we have under-invested in infrastructure – some say $1.6 trillion is needed to bring US infrastructure to an “adequate” level – R&D and education. One area for cuts may be defense spending. The Army wants more divisions, and the Navy and Air Force want more ships and airplanes. Afghanistan must be handled while Iraq is phased down. But spending already doubled from 2000 to 2008. There may be some savings here, but they will be politically tough to impose.
Perhaps a way to handle military spending is to point out that the country is aging and must find ways to spend not much more than a quarter of our incomes on federal spending. If the nation is weak economically, we will become weak politically and militarily. We need not be an imperial power, ready to strike anywhere in the world. Security cooperation might be needed to replace the high spending levels we now have. Famously, we spend $100 billion more than all other nations combined. Maybe that is too much?
If we create a nation where people own homes that are secure, health care is affordable and a college education is within reach, we might next deal with immigration. There are perhaps 12 million migrants illegally living and often working in the US. Most are from Mexico and elsewhere in Latin America. It would be disruptive to send them all home, both for our economy and theirs. But a large number of Americans feel that it’s wrong to “jump the queue” and break the law. I would suggest requiring two years of national service or military service as an “admissions card” for younger ones. Older ones with roots here could be given a set period of time to live here and opportunity to volunteer for part-time socially beneficial work. If they chose not to, they would have to return to their homeland. We need to recognize the anger of many Americans, but also the realities of those who have been used for years by our economy.
If Americans are given a fair deal and can gain security through their own hard work, they will buy into the system and sacrifices required. The US needs to be a global player, both for itself and for the sake of a stable world order. By putting our economy and federal finances on a firmer and more sustainable basis, we can make the future a place we want to visit. Good luck!