MEDFORD
Dear Mr. President-Elect: Congratulations on your electoral victory! Youenter the office at a fragile and difficult time, and this letter offersthoughts on problems confronting the US.
The immediate problem is the near-collapse of the financial system and therecession we’re in right now. The temptation will be to continue throwingmoney at these problems, except that the country is already in debt and it’snot 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 theworld care what you do – the family in Latin America that gets remittancesfrom a relative working here cares, the African farmers who export food orfactory workers in Asia. Although US power is far from absolute, US influence isgreat, 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 flounderingmortgages 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 priceappreciation to the government and the old mortgage owner. That will slowforeclosures and the bleeding of wealth that is killing consumption and thelocal property tax base. The old mortgage issuer, not the taxpayer, shouldswallow 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 helpthem find affordable rental units.
Offer to invest in healthy banks on terms similar to the deal that Warren Buffetmade with General Electric. The bonds would be issued by the banks and pay 10pay with an option to buy shares at a low price. That way, there are nosubsidies and the taxpayer is paid for helping.
Easy money is not enough to quickly reverse this recession. Use deficit spendingcarefully. Give it as aid to states or cities to keep vital services going orfor infrastructure investments. Extend the unemployment compensation period, butnot permanently. Increase grants for community-college scholarships. Those useswill reduce hardship and build our productive capacity. The money is sure to bespent, too.
As we move out of the recession, higher tax revenues will not make enough of adent 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 onhealth care and manages to miss more than 40 million people and has infantmortality double that of Slovenia. We should be able to cover everybody for whatwe now spend. Expect fights with health insurers, drug companies, the AmericanMedical Association and hospitals. Use incentives to have provider groups coverfamilies so if employers want to shift the burden it will be possible forfamilies 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-homepay in 2008 is about where it was in 1987. Over the past 20 years with fringesin – mainly the over-priced medical insurance – workers have only gotten anincrease equal to half of their productivity gains. They are suspicious of tradebecause they’ve not done well while trade has soared. Other factors, likeautomation, the decline of unions and migration play a bigger role, but areharder to fight. The only problem is a lot of the best jobs come from exportsand if we repeat the 1930s, export jobs will evaporate. Anyway, as familiesstart to borrow less and save more, our trade deficits will shrink. That’sdesirable and should be encouraged. We were living beyond our means.
Another way to reduce imports sensibly would be to invest in energytechnologies. Developing more efficient vehicles, whether hybrid/electric ordiesel or natural gas powered, would reduce oil imports. Cheaper solar and otherrenewable sources would reduce greenhouse gases and help persuade India andChina to cooperate. Even with cheaper oil and gasoline, it’s worth spendingmore on R&D and partly switching from taxing wages to taxing carbon. Asgasoline consumption plummets, electronic tolls on interstate highways areneeded, too. Don’t forget to upgrade the electric grid, which will wind powerto be used more widely. That might be a deal with the farm states – phase outthe corn ethanol subsidy, but give farmers rent from wind mills for bettertransmission networks. Other biofuels might prove cheaper anyway and competeless with world food supplies.
Even if we reduce medical and energy costs, we still have a budget deficitproblem. 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 indeficits 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. TheArmy wants more divisions, and the Navy and Air Force want more ships andairplanes. Afghanistan must be handled while Iraq is phased down. But spendingalready doubled from 2000 to 2008. There may be some savings here, but they willbe politically tough to impose.
Perhaps a way to handle military spending is to point out that the country isaging and must find ways to spend not much more than a quarter of our incomes onfederal spending. If the nation is weak economically, we will become weakpolitically and militarily. We need not be an imperial power, ready to strikeanywhere in the world. Security cooperation might be needed to replace the highspending levels we now have. Famously, we spend $100 billion more than all othernations combined. Maybe that is too much?
If we create a nation where people own homes that are secure, health care isaffordable and a college education is within reach, we might next deal withimmigration. There are perhaps 12 million migrants illegally living and oftenworking in the US. Most are from Mexico and elsewhere in Latin America. It wouldbe disruptive to send them all home, both for our economy and theirs. But alarge number of Americans feel that it’s wrong to "jump the queue" andbreak the law. I would suggest requiring two years of national service ormilitary service as an "admissions card" for younger ones. Older ones withroots here could be given a set period of time to live here and opportunity tovolunteer for part-time socially beneficial work. If they chose not to, theywould have to return to their homeland. We need to recognize the anger of manyAmericans, but also the realities of those who have been used for years by oureconomy.
If Americans are given a fair deal and can gain security through their own hardwork, they will buy into the system and sacrifices required. The US needs to bea global player, both for itself and for the sake of a stable world order. Byputting 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!
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David Dapice is associate professor of economics at Tufts University and theeconomist of the Vietnam Program at Harvard University's Kennedy School ofGovernment. Rights: © 2008 Yale Center for the Study of Globalization. YaleGlobalOnline
