Tuesday, February 03, 2004

A Political Survey
Part 3 -
Deficit, and Economy and Manufacturing

The second and third questions in Nick Smith's survey of his constituency pertain to the Deficit (with a capital D) and Economy and Manufacturing. I was please to see that he has an up-to-date figure for the 2003 deficit; which, by the way, is about what Paul O'Neill estimated it would turn out to be. It is clear that the deficit has to be addressed, sooner rather than later.


The fiscal year 2003 deficit (from October 1, 2002 through September 30, 2003) was a record $536 billion without borrowing from Social Security. The 2004 deficit is projected to be even larger.

2. What should we do about the deficit?
Rescind the tax cuts passed in 2001 and 2003.
Raise additional taxes.
Cut spending other than defense and homeland security.
Cut spending in all areas.

I really don't like any of the options he presents as possible answers to the question of the deficit. Some Democratic candidates have proposed answer 1. Rescind tax cuts passed in 2001 and 2003. This is the one I probably would pick, if I went along with the forced choices that the survey presents. However, it would make much more sense to look at each element of the tax cuts, and decide what could go and what should stay. In the world of real politics, however, that may be unrealistic. There probably would be too much squabbling over each little point. The second choice, 2. Raise additional taxes, has a certain appeal but would be political suicide at this point. If nothing is done, though, I expect that in two or three years in would be possible to get elected by telling people you plan to raise taxes. I don't think it will take much longer than that for the consequences of runaway deficits to convince even the most ideologically-bound potential voter. Option 3, Cut spending in areas other than defense and homeland security, implies that the converse: cutting defense and homeland security and leaving everything else alone, is beyond the pale. I do not accept that. We already have the most powerful military in the solar system. I think a lot could be done to revise the military toward a smaller, quicker force by retrofitting existing weapons platforms, rather than building new ones. More SSBN's could be converted to SSGN's; this would improve our ability to project power from sea to land, without having to build another aircraft carrier. The F-22, as wonderful as it is, seems completely unnecessary now. Likewise the B-1's can be used until they are all either shot down or mothballed; we don't need any more of them. If there is one weapon system we do need, it is an armored patrol vehicle that can survive antitank mines and IED's. Perhaps placing explosive-reactive armor on a curved underside would at least allow the occupants to survive, even if the vehicle itself is ruined. Option 4, Cut spending in all areas, strikes me as being impractical, despite its prima facie appeal. Option 5 – other (present on the mailed version but not the online version,) is my choice. I would try to get an honest assessment of the benefits of each of the tax cuts. Specifically, I would try to get someone to find out if any of the supply-side maneuvers actually did result in an increase in tax revenue or boost job creation. Those ones we could keep. The rest should go. Military spending should be cut back; or at least, the currently-proposed 7% spending increase should be moderated. If there is to be any additional spending, it should be for ob creation. It would be essential to create jobs that can be done only in the US, such as nursing and residential construction. I have little faith in the potential for the Bush plan to do enough to create jobs. Even a highly-favorable report by the Heritage Foundation estimates only 997,000 jobs would be created. Since 150,000 young adults enter the workforce every month, we need 1.8 million new jobs per year just to keep unemployment from growing. Of course, some people would be retiring, but this may not be enough to make up the difference. Consider that many people took huge losses in their retirement plans recently, and that there are questions about he viability of social security. Those factors will tend to keep people in the workforce longer. People who were unemployed for a year or two will have to work longer to built up their retirement accounts. Also, as life expectancy increases, it will take a larger retirement account to meet the needs of each aging person. Health care costs are gong up, especially for the elderly.

One way to address these overlapping concerns might be to establish a military service program for middle-aged persons. Anyone in a profession, such as auto manufacturing, where there is a risk of worker obsolescence, would be eligible to enlist in a combined military-service/job retraining program, or perhaps homeland security with job retraining. This could lower the costs associated with a large reserve service, provide low-cost workers for homeland security tasks, and keep workers productive longer as their skills are refreshed. They might be willing to exchange lower wages for a) free job retraining, and b) a boost to their retirement accounts. Something to think about...

In summary, the best approach would be a selective review of the recent tax cuts, combined with trimming the defense and homeland security budgets, and a program to help minimize the impact of worker obsolescence.

Economy and Manufacturing

The economy has shown some sign of improvement nationally with strong growth in the last half of 2003. Michigan, however, has not seen much improvement up to now. One of the most serious problems has been job loss in the manufacturing sector.

3. What should we do to improve the economy and boost manufacturing?
Reduce taxes and regulations to be more in line with other countries.
Cut taxes for everyone.
Increase tariffs and trade barriers on foreign imports.
Institute tort reform to reduce unnecessary lawsuits.

The question about Economy and Manufacturing is pertinent especially here in Michigan. Option 1, reduce taxes and regulation to be more in line with other countries, could potentially be catastrophic. This almost certainly would lead to serious, irreparable environmental problems. It would make more sense to establish import regulations to restrict imports of articles produced in countries that do not have adequate environmental or human rights records. This would be politically touchy, but probably is feasible. Option 2, Cut taxes for everyone, would make some things better, some worse, and it is anybody's guess as to how it would balance in the end. Option 3, Increase tariffs and trade barriers on foreign imports, could work, but would have to be justified in each instance. The Bush plan to increase steel tariffs caused international political problems, and hurt the auto industry more than it helped the steel industry. Option 4 is easy: Tort reform to reduce unnecessary lawsuits. By definition, if they are unnecessary, they should be eliminated. How much of a difference that would make is questionable, but it would help some. To be effective, part of tort reform would have to include caps on the amount of money that the law firms could make on such cases. Option 5 – other (again present on the mailed version but not the online version,) is a good choice, in this case “other” consists of elements from the first four choices.

In summary, unnecessary lawsuits should be curtailed, selective trade barriers should be used – but only with justification -- to level the playing field, and selective tax cuts should be used to increase demand for consumer goods in the lower-income sector. For example, making low-cost housing more affordable would increase the demand for residential construction. That, coupled with a little more income in the hands of the lower-middle class, could lead to significant job creation. Tort reform is a good idea, but to be effective, it would have to reduce the incentive for legal firms to gamble on a potentially big payoff. This can be done most effectively by limiting the potential payoff. Perhaps a bit of a large payoff would be set aside to fund legal representation of indigent persons, or to compensate crime victims.

Thanks again to representative Smith for raising timely questions that demand careful consideration from all citizens, and prompt action.