In Memoriam

Following the ceremony in Tucson last night, I am left with the sense that something that should have been said was left unsaid. The President did a good job in recounting the lives of those lost in that Southwest city on Saturday, and was right in calling for us to make the nation better. And the powerful words of Isaiah and Paul stand on their own. But, nevertheless, something is missing. The following is offered to fill that gap.

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Simply put, what lesson can we draw from the deaths of these people, people who, by their whole lives and by their actions on Saturday, showed themselves to be good in the truest sense, serving others and even shielding others with their bodies and being killed as a result?

Whenever people die in such a seemingly senseless manner we all ask ourselves why such things happen? Why would any God allow such things to happen to such good people? How could a God of mercy and love let such terrible things happen to an innocent child?

The answer is simple but profound, simple but difficult, simple but painful. For God’s ways are not our ways, God’s time line is not our time line, God’s plans are not our plans. And from that we must draw hard lessons, the ones that have been pointed out before whenever good people die: one lesson is that we never know the time or place, and therefore we must live our lives recognizing that today may well be our last; that there is no time to put off those things that we must do; that if we are to change the world, today must be the day. We must wake every morning and, recognizing that today may be our last, act to make that last day an important one.

But let us not forget that even out of the most horrid of evils God can and does bring good; that from wars and oppression have sprung deeper understanding of our relationship with God and with one another, and that in the wake of great evils people have been freed from their chains – both physical and spiritual, knowledge has grown, nations have risen. Yet in all these things we must remember that we are God’s instruments. These things don’t just happen. Rather, the actions of men and women, and yes, children, have brought God’s plans to fruition.

We must make certain our family knows we love them, our friends know we care, and our nation knows we are committed. The immediate lesson that these tragic and untimely deaths teaches is that we must not wait for a better time to do what we must, we must not wait for ‘one more day’ before we act, we must not wait for some better opportunity to do the things we know we need to do to make our lives better, to help our families, to improve our nation, and to bring ourselves closer to our God. We do not know the future; we do not what happens next or what will happen to us tomorrow. We only know that we must act now or potentially lose our opportunity.

Those who died are now in God’s hands and nothing we can offer can change this reality. But, let us all say a prayer of thanksgiving to God that we knew such good people, and another for those who were wounded, both those wounded by bullets and those families and friends who suffer from loss and the fear of loss. And then let us get up off our knees and decide that today we really are going to make a difference, that we are going to be the people and the nation that we were meant to be.

God Bless America.

Creating Jobs - Is it Possible?

Several weeks ago I provided a short discussion on the real issues facing the nation and the economy. The key numbers to remember are these: the US economy needs to create at a minimum 2 million new jobs every year into the far distant future (for all intents and purposes, from now until 2050, when that number – 2 million per year - needs to start to climb), and the economy needs to provide 3% real growth every year – that is growth above any inflation rate or increase in size due to a larger population. Which leads to a simple question:

Is this growth rate possible?

In light of the fact that we was a nation have been hovering at 9.5% unemployment and 16.5% underemployment for a year and a half, and that job growth rates have been essentially flat or negative for much of the past two years, it is hard to believe that this kind of growth is possible.

History shows, however, that the nation did in fact sustain these types of numbers – on average – for its first 185 years. In short, this kind of growth is possible. That being said, has anything changed that might prevent that? The short answer is yes. Through most of the first 185 years of this nation the federal government was rarely more than 10% of GDP (with the exception of periods of war and shortly after the wars). In the early 1930s Federal spending rose above 20% and has climbed steadily since then, and since 1970 has been above 30% of GDP. (Totals of state and local government spending have averaged between 5 and 10%.)

What is the reason for this huge increase in government spending during the last 70 years? Predominantly it has been the rise of the so-called entitlement programs, which now comprise more than 2/3rds of the federal budget. Any successful program to grow the economy will require reducing the percentage of the GDP that is consumed by government (Federal, state and local), and that will mean paring back the entitlement programs.

There is also a ‘slight of hand’ here that is being played by the bureaucracies: those in favor of the entitlement programs insist that they are necessary because the economy is unable to provide for the individuals who are covered. Any reduction in the entitlement program would therefore mean people would be left ‘outside’ of society, as was the case of the poor of the depression of the 1930s.

But this misses two key points: first, it was a host of government decisions to increase Federal spending and Federal meddling in the economy that were the causes of the depression, and second, and most importantly, Federal entitlement programs of today, if transferred back in time with 1930’s technology, would have provided scarcely more aid then did those soup lines. Entitlement programs benefit today from a wide range of technological advancements that have materially improved everyone’s standard of living, mainly despite rather than because of government activities.

At the same time these government programs have a real negative effect – slowing job creation and leaving people – 3% of the working population – almost 5 million people – permanently unemployed.

Reducing the size and scope of entitlement programs necessarily entails some risk, and will inevitably cause pain to those who transition from the entitlement program to a newly created job. The immediate transition becomes the heart-wrenching, bad news story that makes the evening news. But just as lawyers will tell you that difficult cases result in bad law, heart-breaking situations result in bad economic policies. The fact is that sustaining the entitlement programs at their current size (10% + of the Gross Domestic Product) is to not only place a millstone around the necks of today’s workers, it is to drag down the future growth of the economy.

This nation will increase in population by nearly 140 million people in the next 40 years; 80 to 90 million new jobs are needed. (This does not include the tens of millions of new jobs that must be created as industries change and old jobs fade, requiring new jobs to replace the old). The Federal government, as well as state and local governments, must recognize that creating the stage for that job creation is their primary function, and all other functions must be subordinated to that function. Security, economic and monetary stability, and infrastructure are the key roles of government in stimulating the economy. It is to these tasks the government must devote its efforts.

Whither North Korea?

North Korea is once again in the news. And that is exactly where Kim Jong Il wants it. There are many who say he is crazy. He is, in fact, many things: horribly evil, manipulative, maliciously calculating and cold-blooded. But crazy he most certainly is not. In fact, in the sense that every move he makes is thought out well in advance and designed to fit into a well-knit master strategy, I would suggest that he is the single most rational actor on the international scene today, and for most of the last two decades.

Kim Jong Il was elevated to the number two position in North Korea by his father more than two decades ago. At the time North Korea had already entered into a period of economic decline – from which they have yet to emerge (more later). The country, a nation of more than 20 million people, had a GDP of roughly $20 billion and a per capita income of less than $1000 (though it must be recognized that the economy is completely controlled by the central government and thus equating their economic statistics to the outside world is difficult at best and certainly overstated.)

At the same time the nation spends nearly half of that GDP on the military. That military includes an army of well over 1 million, but one that uses equipment that is from 10 to 50 years old, most of their tanks having been obsolete for three decades or more, and their airmen are flying aircraft that, for the most part were obsolete by the time of the Vietnam War. Can they still do damage? Certainly. Could they fight and win a conventional war against the modern, well trained, and well equipped Republic of Korea (ROK) army and air force? Not likely. Could they fight and win a war against a ROK military supported by the US? Certainly not. Is there reason to be concerned? Certainly. Even though the outcome of a conventional war would be certain, the cost in lives and material would be immense.

North Korea suffers from a severely depressed economy. There are few meaningful industries, agriculture is antiquated, harvests have fallen short nearly every year for the past 25 years, health conditions for the average North Korean are deplorable, and the average citizen lives with year-round brown-outs and black-outs and a per capita intake of less than 1400 calories per day.

In fact, when Kim took over day-to-day operations of the government in the early 90s (before his father died), the routine assessment from various Asian analysts was that his father – Kim Il Song – was still pulling the string and that the nation would collapse as soon as the father died. It must be remembered that this is a country with no margin for error. Simple mistakes that can be corrected in nearly any other country on the planet cannot be corrected in North Korea. Simply put, every facet of the economy is on verge of complete collapse and has been for two decades.

And so, when Kim Il Song died in July of 1994 the almost universal assessment was that Kim Jong Il would not be able to hold it together. A wide range of scenarios sprung up, each with multiple variations: there would be a military coup, there would be a collapse into anarchy, there would a war of conquest south in order to distract the people and capture the wealth of the ROK. None of these things happened.

Instead, Kim Jong Il has proven to be every bit as capable of leading the country as his father. Without going into any detail about the seemingly endless series of crises and diplomatic overtures of the last 16 years, consider this: one small country (North Korea), led by a man everyone keeps calling crazy and insinuating that he isn’t too swift, has managed to lead five other nations around in a whirl, keeping them off balance even while managing to balance his own heavily handicapped nation. And which nations has he led around seemingly by the nose? The USA, Russia, China, Japan and the Republic of Korea; the smallest of these countries – the ROK – has a population of 50 million and a GDP that is rapidly approaching $1 trillion - 50 times the size of North Korea’s, while the USA has a population 15 times as large and an economy 750 times as large. This seemingly insignificant country, led by this seemingly insignificant figure, has kept off-balance five countries, each of which is massively more capable then North Korea.

Kim Jong Il is not the charismatic figure that was his father (who was equally dictatorial and heavy handed, but nevertheless charismatic). The senior figures in the government follow him out of a combination of fear and reward, with the very senior figures living very well indeed, but subject to constant close observation and the fear of being accused of some act that somehow threatened Kim.

All that being said: what does he want?

Simply put: he wants to survive. Everything that he does centers on one clear goal: survival of his ‘regime,’ which was, until a little while ago just one man deep (himself). Now he has included his son, and the central issue is to insure that he and now his son retain their position of power, at whatever cost to the nation. Everything else is subordinate to that goal.

Why does he engage in all these actions that seem to bring his nation closer to war and thus to the inevitable defeat?

First, he wants to scare the international community in general and the five powers specifically into thinking that war is imminent. To engage in acts that scare the five major powers that he faces is to shock them and the international community into actions that lead to de facto strengthening of his regime: grants of fuel, food and hard currencies that allow him to buy the goods he needs to stay afloat. By raising the specter of a madman sitting atop a huge army, he has repeatedly and successfully coerced various elements in the international community to give him support – fuel, food and money - that he needs to keep afloat.

Second, he is reasonably certain that he has the veto on war. The US and the ROK are not likely to start a war; even thought they would win such a war, the cost would be too high. He knows for a certainty that any war would result in the destruction of his country and with equal certainty his death. There is no upside to starting a war.

Third, in the last analysis he wants international recognition; he wants a settlement to the war and embassies in Pyongyang from the major powers, in particular the US. Simply put, it would represent two great victories: he would present it to his people that the US had finally given in to him – he beat the US; and it would mean that he would be able to appeal for aid from a wide range of foreign capital sources, both public (the World Bank, the International Monetary Fund, etc.) and private – corporations in the US, Japan and the ROK who would be interested in developing various resources in North Korea, where labor would be cheap and some resources remain underdeveloped – and where such funds and development would mean he could keep his regime intact for years to come.

What does the ownership of nuclear weapons give him? In Kim’s eyes he sees nuclear weapons as providing further standing in the international community and a greater certainty that there will be no pre-emptive decapitation attack from the US or the ROK.

Is there a chance for war? Certainly. There can always be miscalculations and mistakes, even though he has yet to make a major mistake in 16 years of rule. The rise of his son as the third member of the Kim dynasty raises concerns, as it remains to be seen whether the son will have the skills and evil intellect to control both his country and the international community. But it would seem likely that as long as Kim Jong Il lives and is competent that there is little chance of his actions going too far.

What then should we do? The answer of course depends on what end result is desired. And for various countries that answer varies. For the ROK and the US, the desired end game is a united Korean Peninsula, under the governance of the ROK, with the people in the north joining the people of the south in a single, free, economically strong republic. Such a step will not be easy and the cost of rebuilding the north so that it can economically, politically and socially reintegrate with the south will likely run into trillions of dollars, a more expensive and lengthy problem then the reintegration of East and West Germany during the last 21 years.

For the Chinese such an outcome is probably not desired: a united, democratic ally of the US sharing a common border with China? Nor is it likely that Russia would welcome such an outcome. Japan probably finds themselves torn between these two options, with a strong pro-democracy bent and a desire for expanded economic activities in the region countered by a centuries old animosity between the Koreans and the Japanese.

For the rest of the international community there is mainly a desire to see the 60 year old war ended, the peninsula stepping back from its current level of military preparedness, and the north opened to international economic development.

My own belief is that the only answer for the US is to work with the ROK and the North Koreans to develop a solution that steers around the problem. As horribly unpleasant as it might sound, perhaps one solution would be to place the Kim family in the role of a constitutional monarch, with ceremonial but no real power, a healthy yearly stipend and a string of official residences. Make Pyongyang the twin capital of the country and begin a gradual reintegration process of the two halves of the peninsula. This would require modification of the ROK Constitution, but that is difficult, not impossible. What is certain however is that something new must be done. We have a very smart, completely amoral figure, armed with nuclear weapons, sitting on the top of a badly decayed state. No matter how clever he his, that situation cannot last forever. And continuing to do the same thing that we have done for the last 57 years and hoping for a different outcome IS crazy.

Creating Jobs - What About Now?

A friend of mine, an excellent doctor, often says that long-term planning is good, but never forget that patients die in the short-term. What he is saying, in the medical sense, it does no good to develop a plan to help a patient live another 10 years if your long-term plan doesn’t also include immediate resuscitation. In the same sense, creating jobs in two years or five or ten doesn’t help the worker who needs a job now or he will lose his house. So, what can be done now to create jobs this year?

First, we need to take a look at what we mean by jobs.

With nominal unemployment stuck at over 9% and real unemployment somewhere in the neighborhood of 11 - 15% (depending on which set of data used), there has been quite a bit of talk about what needs to be done to create jobs. The answers usually involve some sort of ‘Jobs Program,’ the spending of tax revenues or borrowed money, to stimulate economic activity and spur the creation of new jobs. Unfortunately, little that is being said will have any real positive impact on the problem. Here’s why.

First, there are, in fact, five kinds of jobs. And only three of them are worth anything.

Job type one: some businessman (big or small really isn’t important at this point) makes an investment in his business and hires another worker. This worker then produces revenue, the business grows, pays salaries, taxes, etc.

Job type two: a government (Federal, state or local, again it doesn’t matter) with a real task (police, fire, military, ambassador – tasks that the citizenry recognize as tasks that the government does that benefit society) hires someone to perform that task. This worker does so and we all derive benefits from their efforts and society is better for it, which also directly or indirectly stimulates the economy and the business environment.

Job type three: the government (again, at any level) hires someone to perform a task for which there is no need, and from which society derives no benefit. This is equivalent to a handout, but it is called a job anyway. A good deal of public infrastructure falls into this category, as when the government funds a road or a bridge for which there is no need.

Job type four is when the government spends money in the private sector, hiring a contractor to perform a task which is in support of Job type two – DOD contractors and most infrastructure jobs (building roads) are examples of this type of job. Finally,

Job type five is when the government spends money in the public sector to hire a contractor to perform a task which is in support of Job type three – some DOD contractor and infrastructure jobs are also found in this category.

Job one produces real wealth, job types two and four provide and support the environment and infrastructure that allows the free market to create real wealth. Job types three and five do not produce or support the creation of real wealth and are net drains on the economy and society. So, what we really want in any ‘jobs program’ (no matter what it entails) is to create jobs that either create real wealth or support the creation of real wealth, and avoid those jobs which don’t really support the economy and instead act as a net drain on the economy. But the government has shown itself to be, on the whole, incapable of making that differentiation on the one hand, and at too high a cost on the other. In short, any job creation answer is going to be found not in government but in the free market. (This will be discussed more in a future article.)

Second, there is the issue of costs. The current gross national product (the value of all goods and services) is a bit over $14 trillion per year, and the US currently has roughly 165 million people in or wishing to be in the economy. There are 155 million currently employed in the US, and of those, 2.5 million are employees of the federal government and 12 million work for state and local government, so that not quite 140 million actually produce real wealth. This works out to $100,000 in goods and services per worker in the market place. So, how much does it cost to create an average job in the private sector? A recent article in the Wall Street Journal by a small businessman from New Jersey – Michael Fleischer – gives a brief glimpse at the numbers.

The numbers – for his median employee (and remarkably consistent with the national averages) – look like this:

Nominal pay (per year):                                                             $59,000

(Nominal pay and benefits: +/- $72,000)

Employee contribution to medical and dental coverage:         2,376

State unemployment insurance (tax)                                               126

State disability insurance (tax)                                                          149

Medicare                                                                                                856

State income tax                                                                                1,893

Federal Income Tax (Withholding)                                              6,250

Social Security                                                                                   3,661

Total:                                                                                                  15,311

Take-home pay:                                                                             43,689

Company expenses associated with this employee:

Medical and Dental insurance                                                      9,561

Company paid Life insurance                                                           153

Federal unemployment                                                                       56

State disability insurance                                                                  149

Workman’s comp                                                                               300

State Unemployment insurance                                                      505

Medicare                                                                                              856

Social Security                                                                                 3,661

Total                                                                                                 15,241

Total Company Outlays for this employee:                             74,241

In fact, the problem is a bit worse than this. What is left unsaid is that there is an administrative overhead for each employee, a cost to manage them in time and people, from managing their careers, ensuring that they have the proper work climate, etc., to the straightforward cost of keeping their paperwork straight. That cost varies in every single organization but is, at a minimum 5% and more commonly equal to as much as 10% of employee pay. In other words, just to manage his people, their paperwork and the accounting associated with each of his employees (he has 83 people in his company), Mr. Fleischer is going to spend at least another $4-5,000 per year.

That means each new job costs roughly $80,000 per year. But no one is going to create a new job that can only pay for itself. For any businessman to hire another worker there has to be a reasonable expectation of additional revenue; that is, the productivity of the new employee will exceed not only the cost of hiring that person – the costs above – but provide some additional margin to support the additional cost of that new position and provide some return to the owner. And there has to be some margin of profit for the company. If the above job generates a total of $100,000 per year, that would leave $20,000 to pay for additional operational costs: electricity, water, office supplies, etc., as well as the costs of actually doing business: additional capital equipment, additional raw materials, etc. And then there is the ‘simple’ question of profit: the investors/owners need some return on their investment. All in all, $20,000 isn’t a huge margin, but let’s assume it is an acceptable one.

Now we come to the other side of the equation: what does it take to convince the leader to not hire another worker? Remember that to hire a new worker at $59,000 per year (nominal salary), the business must not only have an expectation of that worker generating the $80,000 necessary to meet all pay and other compensation, the business must have an expectation a meaningful profit, nominally at least 25% gross return (pre-tax), or $20,000, for a total of $100,000 in new business activity. But, if there is going to be an additional expense, say from new taxes on the business itself, or additional costs for hiring, then the new worker’s margin is reduced until that new worker represents at best a zero gain, and if there is any dip in either demand or productivity the new worker becomes a net loss. So, in the end, for an average business to add one medium income employee there must be an expectation of $100,000 in new business, but to “kill” a new hire there must only be a marginal increase in associated costs – or taxes or other government driven expenses – to the small businessman, that will vary from company to company. It will be from as little as a few thousand dollars to as high as $20,000, but it means simply that the gross (pre-tax) profit can’t reach the amount required to invest in the new worker. We will use the most conservative number - $20,000 – four this discussion, but it is probably closer to half of that.

There is one further facet to this problem: the real expenditures government makes to create the average government job. Currently, the Federal government average expenditure for all non-uniformed personnel – pay and benefits - is $106,000 per person per year (as of 2008.) (For uniformed (military) personnel the average in 2008 was $94,000 per person.) There are additional government expenditures for personnel, for example payment to retired personnel, that are not included within that figure as the government pays retirements out of current accounts, there being in fact no ‘lock boxes’ into which the government places money for payment of future retirement accounts, so this number should be indexed up. Nevertheless, we will use the simple number - $106,000 per year – as our reference number. Note that this is an average and, as recent news has shown, government creation of new jobs often comes at a much higher cost.

The market creates new jobs that are controlled by clearly discernible margins and the creation of real wealth, that is, the creation of real goods or services. The business owner hires based on analysis that doing so will result in real income. The government agency hires because it must spend the money; one is creating wealth, one is consuming it.

There are now two separate numbers: $106,000 for each job the federal government creates, of which a certain percentage, perhaps as high as 20% (if the Grace Commission was correct), produce no benefit to the nation; and $80,000 for an average private sector job, each of which will produce approximately $100,000 of goods or services.

Where does all this leave us with regard to Job creation? Business has always claimed, and both economic theory and simple common sense confirm, that taxes on business represent a cost to business by forcing higher prices and thereby reducing demand. While it can be asserted that businesses do not pay taxes, that they simply pass the additional cost on to their customers, the fact is that there will always be both an impact on their demand and a time lag as the market adjusts to the higher prices. Thus, while the business needs to pay taxes (and they must pay withholding taxes this year for next year) the impact of the additional tax is felt as soon as it goes into effect. But the market adjustment and eventual rebound in demand can take place immediately, next week, next month, next year or not at all. Thus the business is left with a reduced demand and increased cash outflows. It is not surprising then that the normal response by any sane businessman is to be fairly certain that there will be adequate cash flow before they hire a new employee.

And so what about Job Creation? Last year the Federal Government collected $295,000,000,000 in corporate taxes. What would this equate to if, instead of being taxed, it were left in the free market and businesses were allowed to use this money to increase their own purchases of goods and services, hire new workers and increase productivity? Would the retention of this money within the free market equate to nearly 3 million jobs (one for every $100,000 retained), or would the number be larger or smaller than that?

Assuming that most businesses are already operating with unused capacity – and that is born out by US government figures – new workers can be hired without buying new office space or new factory space, etc. More importantly, for each dollar that each business retained, that money has a multiplier effect: it is spent by one business for certain goods or services and the receiving business will likewise use that dollar. A common estimate is that each dollar will be exchanged at least five times, meaning that $295 billion left in the free market would multiply into $1,475,000,000 in market activity, a 10% increase in the GDP.

Of course, this would actually require a year to 18 months to take place as businesses changed their processes and expanded their production. But the implications are huge: 10% real GDP growth would mean approximately 10% employment growth, or the creation of more than 14 million real jobs. And 14 million new jobs would mean, within another year as the market expanded with this larger work force, a significant increase in both overall personal income in the US and an increase in personal income taxes collected, more than offsetting the reduced revenue from the elimination of corporate income taxes.

But let’s go back to our small business. What happens when this or that government program levies an additional set of costs on the business? Assume a business has 20 employees and the owner is considering hiring one more worker, at a total cost of $80,000 (as above) in the expectation of generating another $100,000 in revenue. But now a new expense of $1,000 per employee is levied against the business, a total of $20,000. All profit from the new worker has just been consumed. While one might argue that by hiring the new worker he creates the additional revenue to pay for this new worker, that is the logic of a government accountant. The owner must look at it as a bill he must first pay. It is more likely that he will not only defer hiring another employee, he will also look at whether he must let someone else go to maybe free up some additional cash.

Politicians may talk of ‘creating jobs,’ but any significant real job creation can only take place within the market place. And that requires available liquid assets – cash. There is a ready pool of that cash, one that would repay the nation and the economy within a year or two with both massive job growth and substantial tax revenue growth. It’s time to end the taxation of business and leave that money in the hands of the businesses where it will create real jobs and real wealth.

Next: Is this growth rate even possible?

Job - Steps We Need to Take

Last week we began a discussion about jobs; to recap the two most important numbers: we need to create 2,000,000 new jobs per year, and sustain a real economic growth rate of 3% per year, into the far future – at least through 2050. This leads to a simple question with the most complex and far-reaching implications: What must our government do to enable the marketplace to create this many jobs? It goes without saying that the only means to create 2 million jobs per year is found in the market place. It is the task of the Federal government and state and local governments to do all that is necessary for the market place to create those jobs and that growth.

The following represents a short list of the most important steps that the Federal government should take to strengthen the market place and initiate sustained real growth in the economy. The steps are divided into two main thrusts: provide stimulus to the market place to create the necessary economic growth and job growth the nation needs; and placing a rein on government growth – steps which would in turn stimulate the market place. It is not a comprehensive list and each of these steps would in fact be major undertakings of policy and bureaucracy at the federal and later the state level. Further, a great deal of work would need to take place to streamline regulation and provide the level of public safety and oversight required of responsible government, while leaving the market place free to create and develop new technologies and new markets.

Some Steps to Stimulate the Market Place:

1) Eliminate the tax on business and corporate income for all US corporations, leaving that money in the market place where is can create new jobs. As will be discussed below, this is the first and essential step to get the economy moving again, and moving in a vigorous manner. As to the argument that eliminating the corporate income tax would mean runaway deficits, history shows otherwise. Simply put, the economic growth and resulting personal income and personal income tax growth that would follow within two to three years would at more then compensate for this initial revenue loss.

There would a widespread hue and cry about favoritism if this were suggested. But the situation in which the US finds itself no longer is conducive to politically comfortable answers. The economy – the market place – must grow and grow substantially and in a sustained manner. The market place must become the primary focus of the government and the nation as a whole. It is the task of our political leaders to educate those citizens who question this fact.

2) Cut corporate taxes on foreign corporations to a rate that is below that in Europe or Japan. This would provide an incentive for foreign companies to move to the US and establish themselves in the US. Leaving tax rates for US companies at zero would then provide an incentive for these companies to relocate their headquarters to the US.

3) Stabilize personal tax rates. Constant gyration of tax rates makes investment more difficult. If we are to provide small investors more incentive to invest in businesses, there has to be a reasonable ability to forecast real return on investments, that is, returns after tax. That means taxes have to be stable. At the same time, tax rates should not continually penalize people for making smart decisions and thereby making profits. Simple tax laws, with fewer brackets, eventually a single rate for all taxpayers, provides for easier and thus more investment.

4) Eliminate inflation. Inflation’s impact on both savings and capital investments is wholly negative, impacting literally every facet of both private and corporate financial decisions. Even an inflation rate of 2% per year will erode a retirement account in short order. An individual who wishes to retire at age 65, but has a life expectancy that reaches into the 90s will find his effective income halved between his retirement and his death. As life expectancy continues to grow even low inflation rates will increasingly become curses to all of us no matter how much we have managed to save.

Inflation is not a mystery, something that simply ‘happens’ to which we are all simply victims. Inflation is a result of distinct government monetary and fiscal policies. And, the government has demonstrated, for short periods, the ability to manage real growth in the money supply so as to match and enable real growth in the economy, without cycling into periods of inflation. Driving down inflation so that it hovers between 0 and 1% will require real discipline from both the executive and the Congress, but it can be done; it must be done. The citizens must insist on it. The federal government should set as a goal to reach zero inflation within two years and then sustain a zero inflation rate.

5) Eliminate the capital gains tax for all US corporations, leaving that money in the market place as well where it can create new jobs. This would also provide additional incentives for foreign corporations reestablishing themselves as US corporations.

6) Eliminate individual income tax on any income derived from patents or copyrights for US citizens, or for any foreigner who is living in the US and has filed to become a US citizen. This would act as a draw to bring more creative and productive people into the US from abroad.

7) Establish a commission of business executives to review such legislation as Sarbanes-Oxley and other legislation that has generated excessive and costly paper work or otherwise scared business from our shores, to provide recommendations to amend or repeal such legislation.

Controlling Government:

1) Immediately cap all non-DOD spending at the inflation rate, to include Medicare-Medicaid and all other healthcare programs, Social Security and all other entitlement programs.

2) Freeze all non-DOD and non-DHS hiring for three years and then limit any and all hiring to a rate 1% less than real economic growth. (If real economic growth is flat, government should be forced to contract.) Set a definitive goal to reduce the federal workforce (to include all personnel except uniformed military and Federal law enforcement personnel) by 15 percent over the next 20 years.

3) Institute the necessary monetary policies for zero inflation.

4) Balance the budget within 5 years. A balanced budget - spending limits amendment is the surest path to this.

5) Reinstitute the draft.

Other steps.

1) Provide cheap energy. To grow an economy that can provide for a high standard of living for 450 million people means energy supplies must increase and increase substantially. Arguments to the effect that sustained economic growth can be achieved while using less energy work only on blackboards and in policy presentations on Capital Hill. They do not work in the real world. We need more power, lots more power. And that means cheap and abundant electricity. The only path to more power, on the order of 100% more power then we now generate is nuclear power.

Set a goal of doubling the electric power generated by nuclear plants over the next 20 years and doubling it again over the following 20 years. License more plants, begin reprocessing of radioactive waste, put research dollars into nuclear fusion and solve the energy problem once and for all. The Department of Energy (DOE) was established by President Carter with a charter to reduce and eventually eliminate our dependence in imported oil; since then US dependence on imported oil has doubled. A real energy plan is needed, and the money spent on the DOE - to little effect - is a good place to start to fund these new programs.

As a subset of this issue, begin reprocessing of nuclear waste. This would eliminate the contentious issue of storage of nuclear waste, provide a number of high-technology jobs, and provide ready fuel for more reactors. Other countries that have nuclear power generation plants do not have waste storage concerns, only the US. This is not a technology issue, it is a policy mistake. End the mistake, reprocess the fuel and waste, and build more reactors.

2) Space Exploration and Exploitation. In the end, we must expand off this planet if we wish to tap into larger, more economical sources of raw materials and energy. Government must develop an aggressive US space program – not one dependent on foreign participation - in concert with the private sector to move aggressively into the economic and industrial development of the solar system.

Tomorrow: What about Now?

More MDs, More RNs

Several days ago I made the point that no matter what the government is now doing in trying to contain healthcare costs, the effort is fundamentally flawed because there is nothing in the current legislation that will increase the number of MDs, Nurses, Technicians and treatment facilities, and therefore as the number of people who are using the healthcare system increases, there must be a reduction in the amount of healthcare available to any individual.

This leads to a simple question: what might government do to increase the number of doctors, nurses, technicians and facilities across the nation? Before I answer that, let’s look at some simple numbers.

US Population:                                                                   305 million

US Population in 2025 (est.):                                          350 million

Number of people who receive regular healthcare:    250 million

Number of Doctors:                                                           *818,000

Ratio of Doctors per patient

      (for a population of 250 million):                             *1/306

Ratio (for the entire population):                                     1/372

Ratio in 2025:                                                                       1/427

Number of Nurses:                                                            *2,468,000

Ratio:                                                                                    *1/101

Ratio (for the entire population):                                     1/123

Ratio in 2025:                                                                       1/141

* Numbers based on the Statistical Abstract of the US as of Dec 31, 2007

Of course, this doesn’t tell the whole story; for example, many doctors are specialists, so the availability of general practitioners to provide initial care is perhaps a more important figure and that number - a subset of the 818,000 – has been dropping slowly but steadily for quite some time. Higher costs for malpractice insurance and the cost of maintaining an office for a private practice, as well as strong positive public perceptions concerning various specialties has lead more MDs to move away from general practice resulting in a sustained negative trend in general practice. Any solution must address both increases in total numbers and increases in primary care or general practice medicine.

It should be noted that for several decades the American Medical Association argued that there was a glut of MDs in the US and lobbied Congress (it went into effect in 1997) to only fund 80,000 medical Residents per year (through Medicare), with the Veterans Administration funding another 20,000 per year, for a total cost to the taxpayer of roughly $11 billion per year. Several thousand more are funded by states or private organizations.

As of 2007 the 120 US medical schools were conferring 15,730 MDs per year. That number has stayed remarkably consistent for nearly 30 years, with 14,900 MDs conferred in 1980 by 112 medical schools. (As a point of comparison, US law schools produced 43,500 lawyers in 2007.) Roughly 25,000 MDs were entering practice in the US each year, the difference made up of doctors entering the US with degrees from overseas.

Further, the answer must have two parts: what to do in the short term, and what to do in the long term.

In the short term, there are only way two ways to increase the number of doctors and nurses and technicians, and both must be used. The first is to provide encouragement for those doctors and nurses who are thinking of retiring to remain active and in medicine. The most reasonable path to do so is to offer a break on income taxes for those who choose to remain in practice rather than retire.

The second means to increase the number of doctors in the near term is to actively recruit overseas. Hospitals should be encouraged to do so and might be given tax credits to provide for recruiting bonuses. Medicare and the VA might also be provided funds for recruiting in the form of bonuses for qualified MDs and nurses.

Both these programs would need to be sustained for at least 15 years as the second half of the program was developed. That second half is simply put: we need to produce more MDs and Nurses. To be clear, by 2025 we as a nation will need well more than 1 million doctors and 3.5 million nurses. If we are going to be able to provide our own doctors and nurses (assuming an average professional life of 35 years), US medical and nursing schools will need to produce 30,000 MDs and 100,000 Nurses each year. This will require doubling the output of both medical and nursing schools in the next 15 years.

Current medical and nursing schools need to be expanded to their maximum capacity, new schools need to be opened. Doing so without suffering a drop in quality will require a great deal of discipline, but it is possible and there is no other option. Attracting intelligent students into medicine instead of other fields will be a challenge. It will require a change in social dynamics that returns medicine to the top of the cultural ladder for preferred jobs, a matter both of income and, more importantly, social status. It will also require curtailing the negative impact of litigation both on the material cost of medicine (particularly malpractice insurance) and the social cost, the reticence of some to go into medicine, and for those in medicine, a hesitancy to enter into certain types of medicine. This problem and can be successfully addressed, but there is nothing that the federal government is now doing that will do so.

Too Few MDs

The paper this morning announced that the state I live in (Virginia) has too few doctors, then adds that ‘it is a nation-wide problem.’

Amid all the healthcare falderal over the last year and half this point seems to have been lost by the folks in Washington who seek to “lead” us (though, for the record, this blog has pointed this out several times over that same timer period). But it is worth repeating:

If the nation’s healthcare is too expensive, then the one sure way to reduce costs is to increase supply. Any other effort to reduce costs, that is, any efforts that do not include increasing ‘supply’ (the number of doctors, nurses and places to provide healthcare, which I will simply label as ‘beds’ for shorthand, though it includes more than strictly hospital beds) must include rationing, and will also fail.

The current plan, the one passed by Congress and signed by the President just a half year ago, includes no plan to increase the ‘production’ of doctors, nurses and beds.

Ergo, it will fail.

To produce doctors, nurses and beds, what is needed? Enlarged and expanded hospitals and clinics, expanded medical and nursing schools, and more students who want to enter medicine.

So, there needs to be some sort of incentive, some motivation to induce students to switch out of other career fields and into medicine. There are lots of ways to do that, but the most important would be to make it clear that when they become doctors and nurses they are going to be able to practice medicine the way they want, rather than the way a government bureaucrat tells them.

Unfortunately, making a doctor or a nurse takes a good deal of time. Doctors in particular must not only complete medical school, they must also complete an internship and a residency before they enter private practice. For certain specialists this can mean many years of effort. So, how do we fill the gap between today and when a new plan might start producing greater numbers of doctors and nurses? We recruit doctors and nurses from overseas. This already happens without a great deal of government support simply because doctors and nurses want to come to the US to work in our healthcare system which is both leading in technology and techniques and also is more free than most of the healthcare systems in the world. We simply need to be more aggressive in our recruiting.

These two things are needed to address the high costs and shortages of our current healthcare system: a short-term plan to recruit more doctors and nurses from overseas, and a long-term plan to expand the ‘production’ of doctors and nurses by our universities and teaching hospitals. Everything is going to produce other results, but not the desired ones.

(I will continue the discussion on jobs and the economy tomorrow.)