LIMPING FOREWARD ON ONE ECONOMIC LEG

The best thing about the future is it comes one day at a time. ~ Abraham Lincoln

Unemployment continues its steady, if marginal, decline when the Bureau of Labor Statistics reported this week that overall unemployment in October reached 5.8%. This is good news; however it's been a mostly wage-less recovery, as average hourly earnings (now $24.57/hr) have increased just 2% over the past year. Only 40% of the jobs gained last month pay more than this average wage. Furthermore, in 2013 (latest year available) real median household income had decreased 8% since 2007. No wonder many feel unsure about their economic futures.

The government has two broad economic policy means of influencing the economy; (1) fiscal policy (involving government expenditures and taxes), and (2) monetary policy (altering the money supply, and thus interest rates). Since 2009 there has been no effective fiscal policy by the federal government to keep the economy growing. We've relied almost exclusively on the Federal Reserve's execution of monetary policy to slowly emerge from the Great Recession. In this sense our economy has been limping along on only one economic leg (monetary policy).

For these and other reasons, the President and Congress quickly need to enact an expansionary, resuscitative fiscal policy (increase government spending, reduce taxes) to boost the US GDP beyond its all-too-normal anemic growth. According to the Wall Street Journal, our macroeconomy grew a measly 2.3% during the 12-months ending in September. Government (including federal, state and local) expenditures grew at a paltry, real (inflation-adjusted) rate of 1.8% - the first time government expenditures have grown at all since 2009. As it turns out, this increase was mostly due to increases in the Defense Department's expenditures. This is hardly expansionary.

The story of why federal fiscal policy is missing-in-inaction is well understood. Virtually every Republican in Congress refuses to consider the reality of genuine, lingering effects of the recession, especially for younger people and those of modest means. And they fraudulently proclaim that austerity and deficit-reduction are keys to a better future. Bafflingly, Democrats have yet to make sustained or frequent public announcements for their fiscal policy proposals to remedy the recession's persistent effects for anyone below the 90% income earners. The bottom 90%ers are those of us who make less than $120,136 in adjusted gross income (AGI) and despite our overwhelming numbers account for only 54.6% of the nation's total AGI. The Democrats seem scared to say anything about how they will make most Americans better off and feel more secure about the future. In large part that fear cost them the election.

The Democrats' feeble showing in last week's elections (with the fortunate exception of California) confirms their lack of vision and leadership in more than just fiscal policy. Why did Democrats – including President Obama – continue to believe that not actively countering the deceptive aggression of Republicans on economic policy would somehow give them a free ride for maintaining their electoral seats in the House and Senate? It's a mystery with unfortunate consequences.

In January, the Senate Budget Committee will be chaired by deeply-conservative Jeff Sessions, who wants to resurrect across-the-board sequester cuts to government spending this fiscal year. And the Senate Environmental and Public Works Committee will be chaired by James Inhofe, a 100% climate change denier who is in league with radical rightists who would be happy to defund the entire EPA. One often-cited quote of Sen. Inhofe illustrates his environmental views, “God’s still up there. The arrogance of people to think that we, human beings, would be able to change what He is doing in the climate is to me outrageous.” Oh my.

But back to fiscal policy. Although it may necessitate action by Executive Order (or action by the lame-duck Congress – I know, a pure fantasy), I believe a resuscitative fiscal policy should focus on one over-riding objective – increase the annual growth of our economy to 4.5% to 5% per year. Such growth would help vast numbers of people (beyond CEOs) find new, higher-paying jobs. Here are 3 ways revived fiscal policy can do this: (1) improve middle- and working-class income; (2) augment education spending, including changes in student loan debt; and (3) increase infrastructure spending.

(1) Improve middle- and working-class income. There are 2 direct fiscal means of achieving this needed goal, reduce relevant federal income tax rates and increase the federal minimum wage. Practically speaking, increasing the minimum wage is a lost cause at the federal level, especially after January when Congress will be ruled by Republicans. Auspiciously, we saw last week that 4 more States – including Republican stalwarts like Alaska, Nebraska and South Dakota –have gone where the Congress fears to tread and passed higher state minimum wages. The political movement to raise State and local minimum wages is fortunately continuing, so I don't propose changing the federal minimum wage – until so many states have increased wage minimums that multi-state corporations will pressure Republicans in Congress to revise the federal minimum wage so there's more consistency. Don't hold your breath, but it is a possibility.

Until that time, I propose lowering federal income tax rates. Lowering taxes is the life-blood of Republican dogma, so perhaps this proposal is an opportunity to unleash their dogma for the public benefit.

There are 7 different federal tax rates or brackets, depending on one's income level; ranging from 10% to 39.6%. My proposal is to reduce the bottom 4 rates – covering income levels up to and including the 28% rate and AGI of $186,350 (as a single filer). Also, I would increase the earned income tax credit (EITC). This tax credit is a refundable credit that depends on the number of children in the household. The EITC has been one of the most effective fiscal programs to assist low and moderate-income earners. I would increase the maximum EITC in 2015 by 10%, for example to a maximum of $6,006 (with 2 kids) from $5,460, and thereafter automatically adjust it annually based on the Consumer Price Index.

Finally, I would change the federal estate/inheritance tax. Granted, this doesn't have anything directly to do with improving middle-class income, instead it would help reduce the loss of federal tax revenues resulting from my proposed reductions in federal tax rates and EITC increase. Aren't the Republicans (overly) concerned about deficits? Here's a way to mitigate a possible deficit increase (before the resulting increased GDP growth reduces the deficit more) and at the same time make a meaningful contribution to reducing the hugely-significant wealth inequality present in the US. I suggest changing the minimum size of the estate subject to the tax to $4 million from $5.34M, and increasing the tax rate to 48% from its current 40% maximum rate.

Only a miniscule 0.14% of US estates pay any estate tax whatsoever, due to exemptions which have more than quadrupled since 2001. Because the effective tax rate on estates is far lower than the statutory maximum (according to the Tax Policy Center the overall effective rate is 16.6%), increasing the statutory 40% rate to 48% would likely increase the effective rate to about the same rate as the 20% long-term capital gains tax rate for the highest-income earners. Thomas Piketty and many others would clearly approve such a fiscal change.

(2) Augment education spending. Unlike changing tax rates, increasing education spending is not likely to have any short-term benefits to economic growth or incomes. But increasing education spending has long demonstrated significant improvements to people's and the nation's economic wellbeing over time. I propose 3 specific changes to education fiscal policy that will produce sustained and positive macroeconomic outcomes.

First, I would increase federal education spending for post-high-school education, especially in technical skills' training. A growing concern of business is the "skills-gap" for mid- and higher-level technical workers. I propose to add $15B to the Education Department's Federal Higher Education Student Aid work-study programs (that represents almost a 9% increase in the student aid programs' total FY2014 budget). This additional funding will support more technical apprenticeships and related programs after the students have completed either technical programs in high school or enrolled in technical disciplines at publicly-funded 2-year colleges.

Second, increase the post-secondary school tuition and fees tax deduction. Currently, a student (or a student's parents/guardians who claim the student as a dependent and pay the tuition/fees) can claim a maximum $4,000 deduction from his/her adjusted gross income per year. As we all know, college tuition and fees have dramatically escalated over the past decade. From 2003-04 to 2013-14 tuition and fees at public 4-year colleges/universities increased 50.7% in real (inflation-adjusted) terms, or a real yearly average increase of 4.2%. The maximum IRS deduction for educational tuition and fees has not changed. It should increase to $6,000 per year.

And third, unlike any other type of debt, outstanding student loan debt is very, very difficult get discharged, even through personal bankruptcy. There is no substantive reason for this ill-founded exception. This needs to change. So for unfortunate former students whose financial lives have gone off the rails, their outstanding student loan debt can be straightforwardly forgiven through a bankruptcy proceeding, like other liabilities. One step in making it easier to discharge student loan debt in bankruptcy is to remove the "Brunner standard" as a criterion for loan debt dismissal. Another step would be for Congress to amend the Higher Education Act, which allows the government to offer subsidized student loans, so student loan debt is considered just like all other forms of loan debts.

(3) Increase infrastructure spending. This third facet of resuscitative fiscal policy is time-tested and neither new nor controversial. In the past, both Republican and Democratic led Congresses and Presidents have implemented federally-funded infrastructure expenditures to good effect. But this 113th Congress has done next to nothing despite pleas from a wide range of politicians and people across the US. I am hopeful that when the 114th Congress begins on Jan 3, 2015 it will see the fiscal light and act to implement needed improvements in our country's infrastructure. The infrastructure that is most appropriate to first improve is our "data highway," the US internet infrastructure. US internet speeds rank 26th in the world, just behind Finland. Overall, US speeds are only one-third as fast top-ranked Hong Kong (97.63 mbps). We must do better if we want domestic commerce to grow substantially during the coming decade, so employment can rise along with GDP.

I propose that the Department of Commerce administer $43 billion of new spending to enhance our data highway. This will include requiring private and public telecommunications and internet providers (TIPs) to install at least 4G Wi-Fi and broadband fiber-optic cable directly to consumers' residences during the next 30 months. In return for making these electronic infrastructure investments, the TIPs will be provided with a 10% investment tax credit (a type of subsidy to increase business investment) on these new expenditures to incent the implementation of these needed improvements. This funding will be allocated based on the 2010 population of each state and its population density; the more populous and dense the state, the more funds will be proportionately allocated. With these subsidies, the TIP's individual customers' internet service charges will not increase more than the annual change in the CPI over the next 5 years. The cost of these government II expenditures will also be partially financed by increasing the Federal Universal Service Charge (telephone) tax and the FCC User Fee by 5%. By allocating this funding according to population and density internet infrastructure investment will be provided efficiently, more to those areas that serve the most people – rather than Alaska, Wyoming or North Dakota. Sparse, rural areas already receive Federal subsidies for telecommunications infrastructure. Their internet infrastructure may be enhanced in Phase II. This proposed infrastructure enhancement will provide the greatest good to the greatest number of people.

Onward, walking full stride on both legs to the future…