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Good Is Good: 5 Truths About Our Economic Mess

Friday, June 01, 2012

 

Tom Matlack is the former CFO of the Providence Journal and is the founder of The Good Men Project, a non-profit charitable corporation based in Rhode Island and dedicated to helping organizations that provide educational, social, financial, and legal support to men and boys at risk.

The web was abuzz with TED’s decision not to let a former Amazon.com investor making his case for middle-class job creation. Meanwhile Facebook founder Mark Zuckerberg watched his $20 or so billion become liquid when his company opened trading. The French and Greeks have elected liberal leaders who campaigned against austerity as the answer to the Euro debt crisis. And here in the United States the general election is kicking into high gear with the Romney campaign releasing this ad yesterday in key swing states.

Let’s try to get a few things straight here before resorting to mud slinging.

1. Any way you slice it we have a debt problem threatening to kill us.

Government spending here in the United States and across much of the developed world is completely out of control. As of March 2012, debt held by the public was $10.85 trillion or approximately 70% GDP, while the intragovernmental debt was $4.74 trillion or approximately 30% GDP. These two amounts comprise the national debt of $15.6 trillion, roughly 100% GDP.The public debt has increased by over $500 billion each year since fiscal year (FY) 2003, with increases of $1 trillion in FY2008, $1.9 trillion in FY2009, and $1.7 trillion in FY2010.

In addition, the Federal government took over Fannie Mae and Freddie Mac. The on- or off-balance sheet obligations of those two independent GSEs was just over $5 trillion at the time the conservatorship was put in place, consisting mainly of mortgage payment guarantees.

The U.S. government is obligated under current law to mandatory payments for programs such as Medicare, Medicaid and Social Security. The GAO projects that payouts for these programs will significantly exceed tax revenues over the next 75 years. The present value of these deficits or unfunded obligations is an estimated $45.8 trillion.

State and local governments face equal challenges.

The situation in Europe is frankly a lot worse.  And with the inter-dependence of the world economy, the domino effect is a real concern for us here in the United States.

There is a reason some of my best friends–otherwise rational human beings with wives and families and careers–have moved to New Zealand to build self-sustaining farms. They believe that our financial infrastructure is headed for a global melt-down. And soon.

Spending your way out of a recession/depression may make sense to Keynesian economists. But not when the debt already in place is equal to the GDP (before looking off balance sheet) and growing way faster than any recovery could support.

2. Any way you slice it wealth inequality is unfair and crippling.

Warren Buffet and Nick Hanauer point out the obvious: you can’t have 10,000 people in a country of 350 million gobbling up all the wealth. It just won’t work. In a stagnating economy, employment is the issue not the incremental dollar to the already wealthy. A tax policy that doesn’t recognize that is borderline insane. Somehow we have gotten the size of our national debt and marginal tax relates on the wealthy confused. I understand that the wrong-headed logic is that we need to lower taxes on the wealthy so they can create jobs, grow the economy, and thereby generate more IRS revenue. It just doesn’t work that way. Whether Mark Zuckerberg makes 20 or 21 billion will have no impact on national debt.

In looking at the developing world, a key factor in determining success or failure of a modernizing economy is the breakdown of polar extremes of wealth and poverty and the rise of the middle class. In Mexico, for instance, contrary to what you read in the papers about the drug war, the economy has been progressing nicely (solid GDP growth, low inflation, stable currency backed by big reserves) to the point where a recent study showed more Mexicans were leaving the United States to go home than Mexicans leaving Mexico to come here. Amusingly, a large portion of the Mexicans going home were born in the United States and don’t know Spanish. But a job is a job.

Clearly our country is looking more and more like a third world nation in terms of economic disparity between rich and poor and unless we do something about it there will be class warfare, and rightly so.

3. Job growth is dependent on a combination of innovation and purchasing power.

If no one has any money it’s hard for an economy to grow. But at its core, a capitalist system is about innovation. Bringing new products to market that are better than what was there before–designed better, produced more efficiently, offered at a better price. Just saying we need more middle class people to buy shit isn’t enough. To create jobs you need to create companies who need to hire people. And you need smart, educated, qualified people to fill those jobs. Employees who are capable of innovation. Our last great hope in the United States in our intellect. We have always been the world leaders when it comes to technology, to industry, to seeing the future before it gets here and creating amazing products (which create jobs) to capitalize on that forward vision.

Tax incentives to the rich are not correlated to innovation. There is no reason that a millionaire or billionaire should pay less marginal tax than a line worker because his income is classified as capital gains. The thing that is most correlated to innovation is education.

4. The problem is the degradation of our human capital.

You know why I despise Osama Bin Ladin? Yes he killed thousands of innocent people on 9/11. Yes, he organized credible threats against us as a people. But those are not the reasons that I hate him so much.

We’ve spent the last decade focussed on a war on terror, in wars in Iraq and Afghanistan, on hunting Bin Laden down, when our people have been falling through the cracks. Maybe that was his master plan. I don’t know. And nothing here is meant to minimize the courage and service to our country of our military men and women. The issue is one of national policy and priorities.

More than a country of have and have-nots in terms of material wealth, we have a country of have and have-not when it comes to the critical driver of our national economy, education. Harvard and Stanford have endowments the size of small countries. But these are private institutions still primarily for the rich, or for that small sliver of poor people who find their way through the war zone of public education.

Class mobility in our country has stopped, not because of tax policy but because of educational policy. While we’ve been keeping the world safe by spending trillions on drones and high tech explosives to get the bad guys, the screams of very own people have gone unheard. Public education on every level is a failure. Companies in the segments of the economy that are growing and producing good jobs can’t find qualified candidates, while general unemployment continues on at historic highs.

What do we do with our people instead of educate them? We put them in prison. Over two million, over half black or Hispanic.

Again, when looking at the development of Third World countries a key metric is how many people are locked up compared to how many people are getting educated. We are going profoundly in the wrong direction. Apparently the ability of an elite group of Navy Seals to get a bad guy half way around the world is way more important than the ability of the average 10th grader in our country to read or do math.

5. Democracy, and prosperity, depends on a Democratic Economy.

There is no magic bullet. Pointing fingers at rich guys won’t do it. Even if you stripped all 10,000 of the richest Americans of all their wealth and poured it all back into the current broken system it would have no lasting impact.

Yes, we need a fairer tax code.

Yes, we need to reduce the size of government and get realistic about entitlements.

The most important thing we can do is treat our human capital in this country as our most precious national resource. The most imminent threat isn’t terrorists its our inability to educate our own people. Facebook doesn’t make up for the souls rotting in prison. Not even close.

Collective prosperity depends on innovation. And innovation on having a country of smart, educated, and motivated people.

For more of Tom's works, as well as other pieces on related topics, go to The Good Men Project Magazine online, here.

 

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