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Are We Able To Grow The American Economy While Also Balancing The Budget?
Are We Able To Grow The American Economy While Also Balancing The Budget?
I have been in a quandary the past few weeks while I developed and then wrote my Hub, "My Budget Alternative To Rep. Paul Ryan's Path To Survival Of The Fittest". That article was written because of my urgent feeling that our federal budget deficit needs to be closed now to save us from economic ruin. A new round of dismal economic statistics seemed to come out daily as I wrote that Hub.
That got me to thinking about the books that I have read regarding the Great Depression and the New Deal. United States policymakers decided in 1937 that the American economy was firmly on the road to recovery. Economic indicators had indeed been improving for a couple of years but the economy was still in a weak state. The government decided to tighten its fiscal policy and the Federal Reserve tightened monetary policy. These moves reflected prevailing economic wisdom that you expanded spending and the money supply during downturns and then tightened these policies as the economy improved. This was to prevent inflation and huge debt loads. The Stock Market subsequently plunged and banks tightened lending again which led to a sharp dip in the economy. The U.S. finally recovered in 1942 when they entered World War II. The huge ramping up of military spending for the war facilitated the recovery.
This raises the question of whether balancing a budget with such a large deficit will precipitate a similar double dip recession or worse. A large amount of funds will be withdrawn from the American economy whether the budget is balanced by spending cuts, tax increases, or some combination of the two. This is especially critical because our current economy is at a very fragile stage just as it was in 1937. United States political and economic realities have now merged together ensuring that some form of severe budget austerity is sure to be put in place soon. Several plans have been placed into public discourse and legislators are debating them now.
I presented a budget balancing plan with my earlier article and now I have come up with a few ideas to encourage growth in our economy while also ensuring that they remain budget neutral. One area will concentrate on the tax code by way of tax cuts and credits to stimulate economic investment and job growth. Three other areas will target increasing investments in our future namely within education, energy, and innovation. Keep in mind that I want all of these to be accompanied by offsetting spending cuts or revenue increases to ensure that they remain budget neutral. These investments in our future should offset to some degree the lost stimulus from the expected budget tightening while also increasing long term revenue prospects. These moves are meant to establish and preserve future American economic strength.
Corporations and financial institutions have been sitting on a hoard of cash for at least a couple of years. The reasons for this are not clearly known. What is known by most economists and governmental leaders is that we must coax a large amount of these funds into circulation in our economy to allow for its continued and hopefully accelerated growth. I have conceived of four possible tax related ideas to allow this to happen.
The first is a new Investment Tax Credit. This credit would be in addition to those currently in our tax code. It will cover the purchase of new equipment, plants, and offices. I would give it an expiration date of two to three years which will encourage companies to avail themselves of this credit sooner rather than later.
Secondly, I would allow the equipment purchases to be depreciated on an accelerated basis which allows these companies to save further on their federal taxes as an added incentive to invest.
My third idea is a temporary lowering of the Capital Gains Tax. The budget plan I offered in my prior Hub proposed allowing the Bush tax cuts to expire after 2012 as they are scheduled to do. This would cause the long term capital gains rate to rise to 20% from 15%. I propose lowering it to 10% for two years and then permanently raising it back to 20%. This would give businesses a very strong impetus to invest these surplus funds that have been sidelined for so long.
Finally I would institute a new Jobs Creation Credit. This credit would be valued at 50% of the first year salary of the newly hired worker up to $50,000. Credits would be allowed for an unlimited number of hired workers but must also guarantee that these workers be retained on the company's payroll for at least three years. No one year and out. This credit would also be allowed for jobs that are repatriated back to the U.S. from overseas.
I would offset these four tax breaks with either spending cuts in programs that Congress would choose or possibly a temporary Value Added Tax or (VAT). This is a form of a sales or consumption tax that extracts revenues at small amounts from each stage of a product's development. The initiation of these tax credits for two to three years is sure to bring a rush of funds into our economy and jump start it into a much more robust state.
The future of a country naturally lies with its children. The academic results for United States students have been declining for several years. This trend must be reversed quickly if we wish to return the U.S. to economic strength and remain on the cutting edge of science and new technology. State governments all over the country are drastically slashing their education budgets just when the money is most urgently needed. Money saved on educational waste or duplicate services will be money well saved.
Unfortunately most of these cuts will come out of vital programs and teacher layoffs. Class sizes will grow which will further decrease the quality of our children's instruction. Teachers will find it much harder to focus on individual students. Entire subject areas are being eliminated. These conditions cannot be allowed to persist. Our children need complete curriculums to develop them into well rounded adult citizens. Eliminating so called elective programs such as music, art, and physical education is shortsighted. Furthermore we need to continue and expand the Charter School movement around the country. These experimental public schools have been at the forefront of developing innovative educational ideas, systems, and programs that are then conveyed to other schools around the nation.
My belief is that our federal government needs to fill this fiscal shortfall with a serious investment of funds. This should be done in concert with Corporate America and our many universities and colleges. These two sectors also have a lot at stake in developing the academic acumen of our children. Therefore it makes enormous sense that we should partner with them to address this problem. They have ample resources and expertise to assist our communities in teaching students the subject matter necessary to turn them into the high achieving employees and college students that these institutions require.
Providing funds and instructional help to our strapped and failing school districts will help mitigate costs to our governments as well as holding them more responsible for academic results. The balance of the additional costs to the federal government can be offset by cuts to other less vital programs or through additional taxes and fees.
One problem currently facing the United States that threatens both our national security and our economic system is sustainable energy. The supply of fossil fuels such as oil, gas, and coal are finite commodities. We are quickly approaching the point of diminishing returns in the supplies of these energy sources. This is occurring precisely at a time when several heavily populated countries are growing at phenomenal rates.
Furthermore the vast majority of the scientific community recognizes that the overuse of fossil fuels is causing a global warming of the planet that left unchecked threatens the existence of all human beings. Ironically the Chinese are now at the forefront of alternative renewable energy production and development. The United States was the leader during the formation of these industries. Why have we fallen behind? I believe the U.S. has lost its focus on the future. The Chinese government knows that eventually the world will be turning en masse to alternative renewable energy sources out of necessity. They already have started doing so. Why does the U.S. government not fight harder to help redirect resources into these alternative renewable energy industries?
The entrenched industries and their political supporters fight tooth and nail to retain their markets. Instead they should be turning to investing in new renewable energy sources while they are still generating enormous revenues from fossil fuels. I am not going to list all of the alternative renewable energy sources which I feel we should invest in as part of this Hub. You can read my Hub, "Drill Baby Drill Where Hath Thou Gone?", to get my full take on the alternatives I favor. The bottom line is that I feel our government must get fully behind these industries and strongly invest in them.
This can be implemented both through direct grants and through tax credits. We need a comprehensive energy policy. Until now energy policy has been an ad hoc set of actions that only served certain targeted problems or political exigencies. Our economic and environmental futures are at stake. There are many ways to fund this effort to make it budget neutral. I would prefer a Gasoline Tax. I know this will be hugely unpopular but it will not only fund our energy future but it will also encourage energy conservation. I would use a a steadily escalating tax increase to minimize the economic impact on our citizens. It would start at two cents per gallon and increase a cent per year until it reaches ten cents. The legislation allowing this should be written specifically to ensure that this tax is only for a dedicated fund that is used for investing in alternative renewable energy research and development exclusively.
The final areas that I would like the United States government to invest more in to enhance our future are the technological and medical fields. We already do this in major ways through two agencies. One is the Defense Advanced Research Projects Agency (DARPA). The other is the National Aeronautics and Space Administration (NASA). Both of these agencies were created in 1958 as a response to the Soviet Union's launching of the first satellite into space called Sputnik. Our government felt that our national security was gravely endangered so they created and aggressively funded these agencies. Their purpose was to return us to the forefront of space and defense exploration and development. These efforts worked perfectly and quickly. We were the world leader again by the early 1960's and we were soon far surpassing any other country.
I believe that our federal government needs to do this again and promptly. They need to partner with our universities and corporations to identify key potential industries and innovations. Funding them aggressively and turning them into realities must become a top priority. We are starting to fall behind the rest of the world in this research and the situation must not be allowed to stand.
One example area to invest in is high speed fiber optic connections. The U.S. is far behind the rest of the industrialized world in regards to the speed and quality of its communications highway. Most other countries recognized early that fiber optic connections were the key to maximizing online commerce and communications. It is analogous to runners racing in a sprint. We are racing in an armor suit while the others are racing in track gear. The United States must catch up rapidly lest we fall behind the rest of the world in all technological areas.
Another area we should invest in is high speed rail. Rail transportation is much cleaner than traveling by air or automobile. Comfortable high speed rail lines could replace a significant percentage of our transportation system if done correctly. They will not replace a majority of this transportation but even a 10% replacement would be quite significant.
Medical research is another area that our federal government should invest in much more heavily. Examples for this would be cancer and biogenetics research. Cancer is probably the greatest health scourge we have in the world today. Increased dedicated funding with universities and drug companies would do wonderful work in speeding the eradication of many cancers.
Biogenetics and stem cell research are also extremely promising areas of research. The most dramatic future cures to diseases and catastrophic injuries will be achieved within these areas. Tissue and organ regeneration is a strong possibility for the future. It is essential that we remain in the forefront of this innovative research both for public health reasons and for economic growth. Much of the cost of investing in all of these innovative programs will come in partnership with universities and corporations so the expenses will be shared.
The additional cost of the federal government's expenditures in these areas can be recouped from either additional fees and taxes or cutting other less important programs. The bottom line is we need to redirect our national spending to sectors that represent our economic future and these represent that very well.
There is no question that the United States needs to start balancing its budget and soon. The question arising from this is whether we should sacrifice our future in carrying out this endeavour. Our federal government has many functions it is required to perform. These include national defense, administering social programs to protect its citizenry, and to promote an atmosphere for growth of its economy. There are many other functions but these are the most important.
My belief is that the structure of our federal budget is extremely inefficient and is not up to meeting all of these needs. This is especially true of promoting growth. My previous Hub proposed balancing the budget with extensive spending cuts and even larger revenue increases. Unfortunately it also takes a lot of money out of circulation in the economy. This will occur while it is still weak and malfunctioning.
The ideas I propose here will coax money out of corporate coffers to be invested in our economy. These investments and tax incentives are long overdue. I am also rearranging governmental priorities to stress investing in areas that will allow us to grow and push us into the technologies of the future. My educational investments are essential to transforming our workforce into one that will be able to capitalize on our move into these new high technology industries. Finally, investing in cutting edge industries such as fiber optics, alternative renewable energy, biogenetics, and many more will allow the U.S. to reclaim its economic leadership in the world.
The American economy is at a critical crossroads. Enormous debt and a dearth of investments threaten to impoverish us both in the short term and the long term. Therefore a fundamental restructuring of our national budget is urgently needed. Balancing the budget while investing in the future is the sensible way to carry out this restructuring. Some people feel that the era of American exceptionalism is over. I believe this is nonsense. We need courageous and imaginative leaders to turn our economy around and allow our can do spirit to shine through. Some sacrifice and hard work will be required but that was never a problem for the American people in the past. A new budget such as the one I have proposed within this Hub and my previous one will give the United States economy the foundation and direction it needs to reclaim its preeminence in the world.