The United States is grappling with ways to reform financial market regulations to mitigate future crises and trying to provide incentives to entice both consumers and producers to spend and invest using the economic and regulatory policy instruments at its disposal: money, taxes and legislation.
The approach is to use conventional monetary policy, massage the existing tax code and to achieve compromises among the various interest groups to reform the laws governing the various market activities in the wake of the crisis. The reality, however, is far more holistic.
The irony of legislating in a democratic society such as the United States is that legislation builds up in reams and reams of accumulated laws, at times at cross purposes, even though the intent is to be least intrusive legislatively unless it becomes absolutely necessary, no matter what political party is in power, only varying in the degree of bias to change by means of legislative changes. The baggage never gets cleaned up, creating loopholes and litigiousness, legislative band-aids being how democracies typically work.
This tendency to be minimalist leads to band-aids over band-aids until such time when the realization dawns that the wound is chronic and can only be fixed through more intrusive surgery. This mindset, by its very nature, trades foresight for political expediency and favors the status quo rather than clear thinking about problem resolution.
It is true that not always intrusive surgery is necessary and some minor variation of the status quo could be sufficient. But that determination must be made through the process of a sensible policy debate rather than pre-fabricated ideological predilections to shape the reality through political will in a direction that may not make sense.
The historical contingency that the country finds itself in today does not lend itself to resolving its predicament by conventional means. It is necessary in a democracy to always balance the interests of the various interest groups, but doing so without losing sight of the enlightened self-interest of each of the groups over the various time horizons is crucial in formulating sound legislation. Meaning, at the present time it is in the interest of the stakeholders to change rather than to perpetuate the status quo with band aids.
Change is akin to disrobing and robing, both occurring in parallel. The look at the end could either be disheveled or well groomed. Currently, the United States is on its way to becoming disheveled. Therefore, some coherence must be imposed on the process of change by those wanting to change things.
The overarching framework, however, is to provide the necessary government services and provide them well, and that includes regulating the markets appropriately. Most regulation is some combination of oversight (the lawmakers in the legislature) and enforcement (bureaucracies), with little or no provisioning of any other services in competition with the private markets. The point of political compromise is to come to an agreement on what the necessary government services are.
There are several elements to fixing the current troubles of the United States that must work in concert, similar to putting puzzle pieces together to make a wholesome whole picture. And all of these must be worked on in parallel subject to their own time horizons of implementation. The political establishment, in colloquial parlance, must walk and chew gum at the same time.
The primary driver of government reform is the debt burden of the United States which is secularly rising over and above the nation’s output, and if the country is lucky it could, with great vulnerability, be maintained at 100 per cent of the gross domestic product (GDP). This means, the architecture of government operations must be fundamentally redone by consolidating and streamlining government functions and institutions.
The largest government expenditures are its mandatory spending on entitlements such as social insurance payouts and health care for the poor and the elderly. Together, these will rise to at least the entire current budget of the United States over the next 20 years. Health care has been recently reformed within the context of the current recession, but it will not cease to increase costs, unless it is also seen through the lens of government reform. The same applies to social security.
The United States needs to bring under one roof all of its expenditures toward the welfare state with the objective being poverty reduction through human capital assistance and the provision of a social safety net. The budget commission must recommend the creation of a Department of Social Welfare (DSW) that combines all entitlement spending into one government department and as a part of that change must make the next set of changes to the current health care legislation and reform social security. Likewise, financial regulatory reform can design the appropriate regulations and consolidate all the various financial regulatory institutions under the Federal Reserve and the Treasury by 2020.
Intelligence reforms that began after 9/11 must be consummated by bringing the Directorate of National Intelligence (DNI) entirely into the Pentagon at the rank of Deputy Secretary of Defense. All the defense intelligence agencies and the Department of Homeland Security (DHS) along with the Federal Bureau of Investigation (FBI) can be streamlined into an intelligence academy and in the Pentagon under three branches: intelligence operations, analysis and technology to work together with the armed forces. The Central Intelligence Agency (CIA) should be absorbed into the Pentagon’s intelligence functions as a part of counter insurgency (COIN) operations.
The FBI must be independent from the Department of Justice (DOJ), an executive branch agency, because it has the responsibility to investigate elected representatives of wrong doing. The FBI must also be given the responsibility of administering biometric national identifiers both domestically and together with the Department of State.
The long-term threat brewing is the deficit of human capital, as immigration into the United States will slow to a trickle upon the rise in the living standards of other countries, just as was the case with European immigration after 1965. Education must be reformed in the same principled spirit as health care to make accessible quality education from the Pre-K to the high school level across the country. All local governments must be eliminated in favor of state legislatures and their district staffs taking over local governance from the mayors and county administrators to ensure uniform enforcement of national standards in both health care and education.
Change costs money. But it is always better to pay for change than it is to pay for the status quo, especially when doing so is imperative. As a result of the retirement of the baby boomers, government (state and federal) hiring should rise to reduce unemployment, the risk to inflation from which would be close to zero but the impetus to growth would be significant through higher consumption.
To pay for it all, the government needs receipts. The tax regime must be overhauled (the last overhaul was in 1986, more than 20 years ago). People should not have to file tax returns nor do corporations have to face the cost of hiring expensive tax lawyers and accountants to reduce their effective tax burdens if all taxes are collected at the points of incomes and consumption, with the government accountable to the tax payers by providing an accounting of how those receipts were used to provide citizen-centric services, rather than tax payers filing tax returns.
The country’s tax code must be gutted and replaced by a progressive/flat income tax together with a value added tax (VAT) on all products and services (including financial), variable by type. A separate flat tax must be collected to finance the Department of Social Welfare from all American tax payers whose incomes are above a certain multiple of the poverty line. The states’ share of the taxes must be appropriated to the states in a manner that does not involve the tax payer, meaning separate state tax returns need not have to be filed.
The outcome of it all would be a valuable lesson learned for any elected official: to keep the nation’s books in order, meaning fiscal time consistency defined as de facto budget rules in the Congress: a 3% ceiling on the budget deficit to GDP ratio; a 20% ceiling on the budget to GDP ratio over a typical budget window of a decade; a 65% ceiling at any time of national debt to GDP ratio to be achieved by 2020.