Fix This Economy Now!

It’s time to bring the American economy into the 21st century — here’s how.

BY DANIEL ALTMAN-AUGUST 24, 2015

Stock markets are tumbling, the Federal Reserve is dithering about raising interest rates, Donald Trump is claiming the unemployment rate is 42 percent, and some smart people are wondering whether inflation will ever return to the American economy. Maybe things aren’t quite as bad as all that, but there’s definitely room for improvement — and that’s not surprising, given how little the architecture of the economy has changed in the past century.

The U.S. economy is built on a strong foundation, but it’s also an old one. Regulations are enforced and statistics are collected the same way they have been for decades, even as the economy has changed. Once in a while, we try to update our approach with legislation like the Clean Air Act or the Dodd-Frank financial reforms. But we’re always fighting the last battle. Our politics is reactive rather than proactive, since politicians have little incentive to planfor a future when they might not even be in office.

That’s a shame, because there’s so much we can do to improve how the economy works. Among the most pressing problems we face is the utilization of our labor force. The number of people between the ages of 20 and 64 — one measure of the stock of potential workers — is likely to shrink in the next 20 years, and participation rates still haven’t recovered from the last recession. Plenty of people who could work aren’t working, and those who are aren’t becoming more productive as quickly as they used to.

This is a path to stagnant or falling living standards. One way to reverse it is for American workers to raise their game through more schooling or training. The need for both of these is strongest among workers who have lost their jobs as a result of globalization or technology. For them, a new G.I. Bill — call it a “Globalization Intervention Bill” — funding higher education would provide the opportunity to recoup years of production, targeted to the workers who need it most.

Even for older workers, a new G.I. Bill would make sense. Imagine a 50-year-old laborer whose job has disappeared and who is likely to drop out of the labor force. As an alternative, the federal government might offer to pay four years of college tuition at a public university, at a cost of roughly $40,000. If the worker managed to find a job paying $50,000 a year after college, the resulting taxes paid until retirement would easily cover the cost of the initial tuition grant — and the economy’s output would rise by the full value of the worker’s production, which would be much more. And that still doesn’t include the many social benefits of employment. Even if only half of jobless workers completed this turnaround, the program might be budget-neutral and growth-positive.

American workers also suffer from underinvestment in training. Because they can move between jobs so easily — a great contributor to the labor market’s flexibility — companies are less likely to make costly investments in training. But with a market for training, this problem would vanish. For example, companies could offer workers a chance to train for industry-wide certifications that would each have a price tag attached. This already happens in the global soccer industry, where big clubs compensate smaller teams for training young players by paying a fee to sign them. Similarly, when a worker switched jobs, the new employer would compensate the old employer for each certification. When companies wanted to lay off workers, they would waive the right to charge for certifications.

It’s not just mature workers who need help, though. Improving education for children is always a priority during presidential campaigns, and yet the United States has done a pretty poor job of it. There’s precious little money available in the federal budget to bolster education nationally, so unlocking funding from the private markets could be crucial. Offering equity investments in cohorts of students might offer an opening; investors would stump up money to finance the education of, say, the United States public high school class of 2030, and in return they would receive a share of the pupils’ future incomes. The money might be collected by Social Security number via tax returns or withholding, just as with the public entitlement system today.

Of course, school financing does not always translate into school quality — and school choice, at times the darling of both major political parties, has not always raised quality across the board. Even with choice, schools in wealthy areas continue to be better than schools in poorer areas. Yet this might not be the case with students allotted to schools via randomization across diverse communities. Not knowing which schools their children would attend, parents might attempt to ensure that all possible schools met a minimum standard.

Unfortunately, even children with access to good schools sometimes fail because of a lack of support at home, including poor nutrition. Hunger is still a huge problem in the United States; one in five households with childrencouldn’t procure enough food at some point during 2013. Bizarrely, Congress is actually moving in the opposite direction by trying to cut existing assistance programs. Again, accessing private funds might be the answer.

Just as the global health charity UNITAID has raised billions to fight epidemics through small surtaxes on airline tickets, a tiny anti-hunger tax or point-of-sale donation at fast food restaurants might generate the needed funds. The industry collects roughly $200 billion in revenue annually; even 0.1 percent of that amount would be enough to buy several meals for every child in need. The key would be to prevent these private funds from replacing public funds.

Managing public funds is another area where the United States has performed poorly. The federal budget had a decade of projected surpluses worth trillions of dollars ahead of when George W. Bush took office, but tax cuts and profligate spending sent the nation deep into debt well before the global financial crisis. Applying so-called “golden rule” budgeting, by balancing spending and revenues over the economic cycle, might end the boom-bust rollercoaster in Washington. Governments would run surpluses when economic growth was strong and dip into the resulting savings when times were lean.

To bolster the budget even more, the nation could create a sovereign wealth fund for risky and long-term investments. Because very few investors have as long a time horizon as the United States Treasury, the government is in a unique position to take on opportunities with high but long-delayed returns. And because the government also has enormous financial clout, it can take on riskier investments as well; with an enormous portfolio, it could diversify risks much more than almost any other investor. The government already invests in things like medical research and renewable energy, but it could do much more, both here and abroad — and American taxpayers would reap the profits. Of course, the current Congress doesn’t even like the public institutions that already make a profit for taxpayers, like the Export-Import Bank and the Federal Reserve.

Even with such an entity in place, the government would still need to find the bulk of its revenue somewhere else. Right now it relies in part on the corporate income tax, a volatile and unpredictable instrument that affects shareholders, workers, and consumers in ways economists hardly understand. The current tax system has also failed to deal with the misallocation of opportunity due to inequality. As I’ve written before, theeconomic pie gets smaller every time an opportunity goes to a stupid rich kid instead of a smart poor kid. Inequality of wealth — both your parents’ and your own — affects the allocation of opportunities more than any other kindof inequality.

To mitigate this effect, wealth has to be redistributed; indeed, a wealth tax could help to replace the corporate income tax, providing a steadier source of revenue that would also put a dent in inequality. Wealth taxes aren’t popular, of course, and they might not even be constitutional. But a hybrid income and wealth tax might pass muster with legal and economic experts alike. The tax rate on income would depend on wealth, according to a sliding scale; strivers with high income but little wealth would pay less than people who chose to live off the interest from their fortunes.

If the sum of these proposals lifted the production of American workers by even a couple of percentage points a year, the United States would hit Jeb Bush’s 4 percent target easily. But they would do much more, too, by raising living standards more equitably and equipping future generations for a new century of prosperity.

Photo credit: Spencer Platt/Getty Images