This year we have witnessed one of the most expensive election years in history. According to NPR, over $4 billion was spent to influence your vote. The result of this incredible outpour of resources is that Republicans control the House; Democrats control the White House and Senate. We also witnessed the incredible force of the Tea Party Movement. In many respects, their efforts resulted in a Pyrrhic victory. The Tea Party propelled O’Donnell, the one Republican who could not win in Delaware, Sharon Angle, the one Republican who could not defeat Harry Reid in Nevada and Joe Miller, a person so unelectable that Lisa Murkowski appears to be winning in Alaska as a write in candidate. Had the Tea Party been more sensible, then the Republicans may have won both the Senate and the House. I think the mandate from the people (the voters) is that health care and other social issues should not suck up so much time and that doing something to help the economy grow should be the main focus for both parties. If President Obama refocuses his administration on creating jobs and bolstering the US economy and the House Republican leadership steers clear of trying to repeal health care legislation and focus on the economy and job creation, we have a chance to really attend to the issues of people.
So what does the election mean? Most times a split like we see today means political gridlock, and with the last few years, grid lock is better than the uncertainty we experienced from an over active government that excelled in creating an immediate fix to economic collapses such as the liquidity crisis, automotive meltdown, bank failures and Fannie Mae and Freddie Mac demise, but lacked the ability to tackle real economic reform to address the root cause of the various “bubbles and collapses.” We witnessed more discussion surrounding health care reform than banking reform. And we all know, that health care reform will require years before it affects the economic vitality of the country while banking reform is more immediate. As to US housing, according to Bloomberg, we have almost 14% of all homes either foreclosed, under foreclosure or delinquent with their mortgages right now. Per the July 2010 report almost 19 million homes in the US are vacant. Furthermore, Fannie Mae & Freddie Mac (two entities that are insolvent and almost entirely owned by the US government) represent most of the mortgage lending in the US, up from 37% just before the housing bust in 2007. However, per Inside Mortgage Finance, 96.5% of all mortgages during the first quarter of 2010 were somehow backed by US government agencies, up from 90% in the same quarter in 2009. This means that the government is involved because private entities are waiting to learn and understand the new rules. This type of government procrastination harms the economy and delays the recovery.
If anyone of the newly elected officials wants to listen, Colman Knight offers a few answers:
First, for the past year the Treasury has postponed reforming the Mortgage Industry which would include what do with Fannie Mae and Freddie Mac. This lack of facing has resulted in a stall of private entities waiting for the government to announce the new rules before they venture back into the lending industry. Have you noticed how banks are NOT lending? This means that the Federal Reserve is the largest buyer of mortgages at the moment. Stop delaying what is right in front of you and face the music. Reform the mortgage finance industry. The lack of attention to this area during the early 21st century is what led the subprime market to collapse the housing market.
Second, per Pew Research, we have $1.6 trillion of infrastructure work necessary to fix our crumbling, roads, bridges, and drinking water and gas pipelines. Since we have to spend the money anyway, we might as well monetize the cost and put Americans to work now. This action would facilitate a real economic boost that would assist the US economic competitiveness for years to come. Using the Stimulus as a guideline ($786 billion spent, created or saved 3.3 million jobs), we should expect to create more than 6.7 million jobs. In our current situation, this action reduces the unemployment rate from almost 10% to just above 5%. Consider all of the money saved in unemployment payments, welfare, food stamps etc. And, recognize the value to the individual lives of Americans and their personal well-being. We can finance the cost by increasing the gas tax, user fees etc. on water, gas and other conduits to pay for the bonds over many years.
Third, according to JP Morgan Chase, of the $1 trillion of corporate cash, somewhere between 30% and 40% is held overseas and is not repatriated because of taxes. Back in 2004-2005, an amnesty for taxes was created and the IRS estimates that $365 billion was brought back to the US. 2004 and 2005 were very strong years for the US economy. Do you think the two might be related? Using the same approach, we could expect a minimum boost to the US economy of almost $20 billion in taxes and $300 billion in corporate funds that must be spent in the US or paid out in dividends in 2011 and 2012. A corporate gift that boosts tax receipts and helps the US economy grow does not seem too bad to us. Just to put this proposal in perspective the US is the only developed country in the world that does not have a special incentive to promote companies to repatriate funds.
Fourth, let’s get real on Social Security. Face it! This system will go bankrupt if we do not do anything. There are simple solutions to the problem. Our demographics indicate that people are able to work longer and we need to encourage our citizens to do so. A gradual rise in the retirement age to receive full benefits makes both economic and policy sense for the country’s future. We also know Social Security requires more payments in than it now receives. Increase the wage ceiling upon which we base contributions. It is needed to solve the problem.
Fifth, Medicare is going insolvent faster than Social Security. We need to face that issue. First, match the age someone can access Medicare with the Social Security retirement age. Now that we almost have universal health care, there is no excuse not to do so. Second, continue to increase premiums for Medicare to match costs for those who can afford it. There is no reason for poor workers in their twenties to subsidize their millionaire grandparents. We can phase in an increase over years to ease the burden. Third, we need to create financial incentives for people who are living unhealthily at the taxpayer’s cost to change their behavior. If you smoke, are obese and abuse drugs, there should be a surcharge added to Medicare and other insurance premiums so that the rest of us who exercise, keep our weight under control and don’t abuse alcohol, drugs or tobacco are not subsidizing your bad habits and encouraging you to continue to do so. We know from taxes on cigarettes and alcohol that cost is the best method to change behavior.
Finally, we need to revamp corporate executive incentives so companies are less likely to risk the solvency of their company for a quick self-serving profit where only the employee, taxpayers and shareholders suffer and executives walk away with millions or even hundreds millions of dollars in benefits. Before Ronald Reagan changed the tax laws, most companies (almost all publicly traded companies) had deferred compensation plans that paid executives overnumerous years which encouraged the retiring executive to have a vested interest in the long term survival of the company. When tax rates dropped, the unintended consequence was that executives lost that vested interest because they switched from deferred compensation plans to receiving most of their money in present time salary. It is not too much to expect our government to act and create incentives when the goal is something this vital for our country’s economic survival, much less prosperity. That is why we propose that the Securities and Exchange Commission, as well as the Treasury and Federal Reserve, propose that all corporate executives receive a significant portion of their compensation in a deferred account, paid over many years, and that this benefit ceases if the company fails. In our opinion, this is the best method to protect the public from the mistakes made in the 1980s through 2008.
The bottom line is a call for all of us – lawmakers, business leaders, each and every one of us – to face reality. Regardless of political party affiliation, we must recognize the truth, take responsibility, have appreciation for what works well and look directly into what does not. We at Colman Knight are, of course, aware that we do not have a direct line to lawmakers, nor do we expect many of these proposed ideas to be enacted this year or next. However, we offer them to you in the spirit of raising awareness and the hope that you will assist in elevating the dialogue when it arises among your friends, neighbors and community circles; perhaps then our political leaders will hear the ideas and begin to face the music.
