I hope you had a great weekend! This painful presidential campaign is almost over!
LRPC’s Monday Morning Minute for this week, “Nine Key Things Next President Should Do To Fix The Economy: Brookings” (presented below) comes to you courtesy of ThinkAdvisor. As an independent, objective Registered Investment Advisory firm, Lawton Retirement Plan Consultants, LLC has access to research from many sources. Be assured that I will share enlightening, useful information with you each week. If you are short on time, make sure you review each of the nine points to see if any are of interest.
Our next President will face many challenges. This piece focuses on those related to the economy and references an important study from the Brookings Institution.
Have a wonderful week!
Nine Key Things Next President Should Do To Fix The Economy: Brookings
By Bernice Napach, ThinkAdvisor
Although the economy hasn’t always been the focus of the current vicious and protracted presidential campaign, it will be among the most important challenges facing the next president.
With that in mind, the liberal-leaning Brookings Institution has issued a series of reports on issues related to the economy the next president will face, including recommended solutions. We’ve consolidated them into nine issues, ranging from fixing crumbling infrastructure to creating jobs for the poor and middle class, reforming health care and addressing the swelling levels of college debt.
1. Fix crumbling infrastructure
“The next president needs to frame infrastructure as an investment, not as spending” and create “programs to maximize return on investment, not to just seek out shovel-ready projects,” wrote Aaron Klein, policy director of the Brookings Initiative on Business and Public Policy.
He recommends enhancements to the Transportation Infrastructure Finance and Innovation Act (TIFIA), which provides credit assistance for qualified projects; reinstatement of the Build America Bonds program; and federal coordination with state and local governments to support private sector investment in infrastructure using a project finance model.
That model, used more widely outside the U.S., tries to align government incentives with those of private capital. For example, in exchange for the concession rest stops along Interstate 95 in Connecticut, Dunkin Donuts, owed by private equity firm Carlyle, had to contribute money to invest and maintain that section of the roadway.
Another attraction of infrastructure spending: it “has historically paid for itself, mostly through direct user fees,” according to the report.
Klein suggested the creation of a Department of Infrastructure whose mission would focus on economic growth and on linking our various infrastructure modes and networks more efficiently. It would allocate funding on the basis of performance and economic analysis.
2. Create more jobs for the poor, the middle class, including “prime age” men
Although the latest Census data shows the average family’s income rose sharply between 2014 and 2015 and lower income families benefitted disproportionately, inflation-adjusted incomes still have not recovered to the levels achieved before the last recession, according to Brookings.
The current inflation-adjusted income of the median American household ($56,516) is actually slightly below the 1999 level. Also, more than one in seven men in their prime working years are not working, up from 1 in 20 reported 50 years ago.
“If you want to improve middle-class incomes and help people at the bottom move up the ladder, there is nothing more important than creating jobs,” wrote Isobel Sawhill, addressing the next president.
In addition to more spending on infrastructure, Sawhill favors expansion of the EITC [Earned Income Tax Credit], which targets “people who will spend, and not save, the money.”
She also recommended a long-term solution based on better education and training or retraining, and a stronger safety net coupled with subsidized jobs in either the public or private sector.
David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy, suggested reforming the federal disability program so that those who can work, even on a part-time basis, receive the type of accommodations prescribed by the Americans with Disabilities Act, including possibly government wage subsidies.
3. Improve productivity
Productivity growth, “the most important determinant of the growth in average wages and living standards over the long run” has been slowing, and needs a kick-start, wrote Martin Neil Baily.
But despite its importance to the economy, it rarely gets mentioned in the policy debate and has been completely absent in this presidential campaign. “The next president should turn her/his attention to it,” wrote Baily.
He recommended that the next president “scrub our regulations to make them more streamlined and efficient…[and] reform our corporate tax system, which discourages investment while generating very modest tax revenues.”
The next president should also “use her or his bully pulpit to preach the necessity of addressing the skills problem, which will require the combined forces of state and local government, businesses, academia, and the federal government to solve.”
“The best companies in the world should be able to set up shop in America, just as American companies have traditionally spread best practices around the world,” wrote Baily.
4. Reform health care
Slowing productivity growth is not the only economic issue that hasn’t been getting much attention in the presidential campaign. Health care policy is another, according to Brookings analysts.
That’s “unfortunate because the next president and Congress will face decisions about the future of the Affordable Care Act (ACA), the solvency of Medicare, and slowing the rising cost of health care in ways that contribute to better health,” wrote Alice Rivlin, former director of the CBO and vice chair of the Federal Reserve, now senior fellow, Economic Studies, Center for Health Policy at Brookings.
Moreover, health care now accounts for 18% of U.S. GDP, which makes it an important economic issue.
“Realistically, whichever party wins the White House will find themselves negotiating complex incremental changes in existing federal programs with representatives of the other party and a wide range of public and private stakeholders,” wrote Rivlin.
The two parties have diametrically opposing views of the ACA — Hillary Clinton favors the ACA but wants to reform it; Donald Trump wants to repeal it.
Still Rivlin is hopeful there can be compromise. “Health care is one of the few areas in which bipartisan cooperation has survived in the increasingly polarized Congress and even produced bipartisan legislation, such as the replacement of the unworkable Sustainable Growth Rate formula in Medicare with more powerful incentives to reward value rather than volume of health services.”
She advised the next president “to work hard to strengthen bipartisan cooperation in Congress” to preserve and enhance the ACA and Medicare. “There are no partisan magic bullets in health care — just hard work to make incremental progress,” wrote Rivlin.
Henry Aaron, however, noted that even if Clinton is elected, which would help ensure the survival of the ACA, the reforms she’s proposed such as a refundable tax credit for people with out-of-pocket medical expenses in excess of 5% of income will likely be blocked if the Republicans retain control of both houses of Congress, or retain enough votes to sustain filibusters in the Senate.
5. Fix Social Security and retirement plans
Bipartisan efforts are also needed to fix the U.S. retirement systems which are “broken, but they can be fixed,” wrote Joshua Gotbaum, guest scholar in economic studies at Brookings.
He noted that half of Americans approaching retirement have no pension or savings and will have to live on Social Security, while many in the other half that has retirement savings suffered losses during the financial crisis.
Recalling a bipartisan reform of Social Security in the 1980s that helped preserve the program for half a century, Gotbaum recommends reform now that was proposed by the Bipartisan Policy Center, which sets a minimum benefit for those who depend solely on Social Security for sustenance and better treatment for surviving spouses, whose benefits were often cut drastically when their higher-earning spouse dies.
The proposal also gradually increases Social Security’s full retirement age and maximum benefit age, beginning in the next decade, increases the payroll tax rates for employers and employees by a total 1% as well as the income subject to those taxes and taxes benefits for those earning more than $250,000. Such reforms would leave Social Security fully funded for the next 75 years or longer, said Gotbaum.
He also supports “auto-IRAs,” proposed by some of his Brookings colleagues. Under such a program, employers would offer a payroll retirement savings but wouldn’t be required to contribute or be legally responsible for the funds, as they are for employer-sponsored 401(k) plans. Employees would be automatically enrolled but have the ability to opt out and change contribution rate as well as investments. Such plans are already operating in five states and have been endorsed by (some) Republicans and Democrats, writes Gotbaum.
6. Fix student loans
One reason many Americans aren’t saving enough for retirement is the burden they have in the form of outstanding student loans, with debt in this area swelling to a total of $1.3 trillion in the U.S., surpassing even credit card debt.
Clinton has proposed several initiatives to help those debtors, including income-based repayment plans, payroll deduction for payments and three-month moratorium to all student debt payments. She’s also proposed free tuition at community colleges and eventually at public colleges for in-state residents with family incomes of $125,000 or less.
Trump has said he would work with Congress to pressure institutions with large endowments to spend more on students — or face a loss of their tax-exempt status.
Ofer Malamud, a visiting fellow at Brookings, recommended replacing the current array of student loan repayment options — and there are many — with “a simple income-contingent repayment system for all borrowers.”
Payments would be capped at a certain fraction of income, such as 10%, and borrowers earning below a certain threshold could postpone their payments. After a certain period of time such as 25 years, all debts would be forgiven.
Malamud recommended a single program implemented directly through the tax system. Borrowers would repay their student loans directly through their paycheck, just as with Social Security contributions, and payments would be based on their income, not the interest rate of their loans. Any student loans that were not paid off after 25 years would be forgiven.
7. Reform the tax system
“Reforming the tax system so it pays for government spending, treats taxpayers fairly and improves incentives for productive activity can only be a plus from an economic standpoint,” wrote Brookings economists William Gale, co-director of the Urban-Brookings Tax Policy Center, and Aaron Krupkin, a senior research analyst at the center.
They listed a number of recommendations to help fix the unwieldy and unfair U.S. tax system:
- A 10% value-added tax, which could raise 2% of GDP in revenues, even after accounting for interactions with other taxes and cash payments to offset the hit to low-income families.
- A carbon tax, which could increase GDP by 0.5%, according to Tax Policy Center and Congressional Budget Office estimates, while costing the producers and users of carbon in the hopes of decreasing both.
- A new approach to corporate taxes, which currently create distortions in the economy and reward debt. Possibilities include restricting interest deductions, replacing the corporate income tax with a tax on shareholder wealth accumulation, and taxing corporate cash flow instead of income with a deduction allowed for wages, to encourage new investment.
- A new approach to personal income taxes to replace the current system, which often results in low- and middle-income earners facing very high effective marginal tax rates. Suggestions include a 20% secondary earner tax deduction until a cap is reached because currently the secondary earner in a married household typically pays a higher effective marginal tax than the primary earner, expanded eligibility for the EITC and transforming the child and dependent child care credit to a refundable benefit.
- Increasing the tax burden on high-income households, whose income has risen dramatically over the past several decades while their average tax burden, as a share of income has remained relatively constant. Suggestions include restrictions on tax expenditures, taxing capital gains at death, a higher estate tax and capping itemized deductions using possibly a per-filer limit or a 15 cents per dollar limit. The latter would raise more than 0.5% of GDP in revenue.
“Even though the politics have been, and will continue to be, a major barrier to reform, the next president may well be judged a success or failure in significant part based on how he or she handles tax policy,” wrote Gale and Krupkin. “It’s time to stop kicking the can down the road.”
8. Reduce the federal debt
If current policies remain in effect, the federal debt will gradually rise from almost 77% of GDP at the end of 2016 to 150% by 2046, and higher after that. During that same period, the federal deficits will rise from roughly 3% of GDP today to 9% by 2046, according to Gale and Krupkin.
Many blame the debt on too much spending — and spending on Social Security, Medicare, Medicaid, and net interest are big drivers of the debt. But there’s another key factor: the amount of revenue collected — taxes — which is not expected to rise as fast as spending.
“This point often gets lost in debt debates,” wrote Gale and Krupkin. “Rising deficits and debt aren’t intrinsically a ‘spending problem’ versus a ‘tax problem,’ any more than one side of the scissors does the cutting. It’s the imbalance between the two that creates rising debt.”
They suggested “a combination of tax increases and spending cuts that stabilizes the debt-to-GDP ratio at a manageable level in a reasonable time period. Economic growth would help, “but we can’t grow our way out of the problem under any reasonable set of circumstances,” they wrote.
They noted the range of debt-GDP targets that have been proposed runs from the current level — about 77% of GDP — to 36%, the average level in the 50 years before the Great Recession.
Even targeting the high end of 77% of GDP in 2046 would require spending cuts of “about $500 billion per year, immediately and permanently.”
The economists note, “The next president, whomever he or she may be, should not ignore this problem. The longer we wait, the worse it gets.”
9. Create an Office of Opportunity
“The U.S. is an increasingly class-stratified society, with a strong correlation between the circumstances of birth and prospects in life,” wrote Richard Reeves, co-director of the Brookings Center on Children and Families, adding that race is another key factor. Just 13% of those born in the bottom economic quintile make it into one of the top two quintiles as adults, according to Reeves.
An Office of Opportunity “may seem a tepid response to the opportunity gaps in the U.S. But it is important not only to promote policies but to create the right policy architecture, in order to invest wisely, for the long term, and towards clearly stated goals,” wrote Reeves.
The office would:
- Set out clear measures and goals. “If upward mobility is so important, it would be good to know how much of it we have, and what the trend is.” The office could track progress and set a target.
- Create a dashboard of opportunity “leading indicators” which would be updated annually while economists and demographers wait for the next generation to measure actual mobility.
- Share data is shared across government agencies and used for research.
- Assess policies for improving social mobility. “Just as the CBO ‘scores’ spending, so the Office of Opportunity should ‘score’ likely mobility impact, drawing on the best available evidence.”
Lawton Retirement Plan Consultants, LLC (LRPC’s) Monday Morning Minute is crafted to provide decision-maker’s with important information about the economy, investments and corporate retirement plans in a format that allows a reader to consume the information in less than 60 seconds. As an independent, objective investment adviser, LRPC has access to many sources of research and shares the best and most relevant information with its readers each week.
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