The minority party should focus on the effectiveness of existing programs

Today, our Congressman spoke at a local business alliance luncheon. Being from the minority party, he had the usual comments about what the majority is doing wrong. I suggested that the SBIR grant program for small business was flawed - the focus should be on growing businesses, not perpetually small operations whose main expertise is applying for and winning government grants. (This was not my opinion, but the GAO's.) He replied that rather than give out the grants at all, he'd like to give every business that creates a new job a 25% tax credit.

This is where the minority party gets it wrong. Both parties focus on strategy and power, regardless of their majority or minority status. But the minority party, especially when a minority in all 3 branches, is not going to drive policy. Better to present their alternate proposals, then focus on the government's execution of its existing programs. Uncover waste, fraud, unintended consequences; expose these to the public, and push the majority party to govern effectively.

Going back to the SBIR example, when the minority says "We shouldn't spend that money at all, we should give it back to the people"; well, no matter how valid that position is the majority will respond, "We won the most votes last time, so more people clearly agree with us that it should be spent."

On the other hand, if the minority party points out that the SBIR program has stated goals of creating jobs, yet half of all small business grants go to "small businesses" that have been small for decades, receive the bulk of their money from a never-ending stream of small business grants, and have few productive skills outside of winning those grants - what will the majority party say? "True, but we won the election so the American people clearly want us to waste that money."

Sustainable trade is fair for all countries

The United States' trade balance with other nations was negative $517 billion for the last 12 months ending March 2010. Last week, Nobel economics laureate Paul Krugman suggested that retaliation for perceived currency manipulation by China could be a threat to impose a 25 percent import surcharge on Chinese goods.

Before we start a trade war with a future superpower peer, we should re-visit Warren Buffet's 2003 proposal to balance the trade deficit. Simply, every time a company exports $1 of merchandise from the U.S., they receive the right to import $1 of merchandise. We set up an exchange where companies can sell import certificates that they won't use and buy ones they need. Since the deficit is so large, and has built up for so long, such a system would initially shock markets. So the federal government could sell extra import certificates on the market to stabilize prices and purposefully run a declining trade deficit, for example, $400 billion the first year, $300 billion the second, and so on. During this transition period, the program would thus result in some revenue for our government to fund export programs such as ports and export banks.

This system will end our unsustainable trade deficits through a combination of (1) making import certificates too expensive to be worth importing certain cheap goods (2) moving some manufacturing to the U.S. to prevent the need to buy import certificates for goods sold here, or to produce export certificates for goods sold overseas. Such a system is fairer than tariffs, since it doesn't target specific products, industries, or nations. All of our trading partners would be welcome to move production capacity into America, and thus produce import certificates rather than consume them.

There is hope: the Economic Policy Institute is studying the proposal's implementation, and Senators Dorgan and Feingold have in the past introduced a bill before Congress. Of course, concrete proposals like this will bring out all of the reasons we should not do this, and no new system is perfect, so it would need to be adjusted in practice.

The goal, however, must be achieved: over time, the United States should run a neutral trade balance.

Modify Social Security so that Americans invest in America

Today I received my Social Security Statement. My employer and I each pay into Social Secuirty taxes 6.2% of my salary, up to an annual limit of $106,800, an amount which increases each year. In 2008, these taxes collected about $800 billion.

Compare this number to the $500 billion worth of U.S. Treasury debt purchased by foreign countries from October 2008 - October 2009, and you see that we "save" about as much for our elderly as we borrow from other countries.

I propose a modification to restore Social Security as insurance, rather than entitlement.

1. Set Social Security Taxes at 12% (6% each from employee and employer) up to $120,000 annual income, but do not adjust the income limit each year.
2. Add a 4% deduction (2% each from employee and employer) onto annual income above $120,000, which goes into a Personal Retirement Account (PRA), which exists in the name of the employee and invests automatically into 10-year inflation-indexed U.S. Treasury bonds
3. Upon death, disability, or retirement, the PRA money can be withdrawn (at a limited rate) by the account owner to use for living expenses
4. Once the PRA account is depleted, Social Security kicks in, if needed (Note that the longer you wait to receive Social Security, the higher your monthly payment is.)
5. If the account holder dies with a PRA balance, that money passes to heirs

If you are fortunate enough to not need Social Security Insurance then good for you, but when you do need it your payout will be higher since you waited longer to start collecting.

By not raising the Social Security income limit, over decades more Americans will transition into PRA levels due to inflation and wage growth. Gradually, we will modify ourselves into a nation of self-supporting savers who have insurance against calamities, rather than an entitled population of older retirees paid by younger workers.

By placing all PRA funds into Treasury bills, we eliminate market risk, remove the inevitable lobbying establishment that would flock to PRA funds invested in private securities, and establish a large, reliable source of buyers for U.S. Government debt. While government debt in general should be avoided over the long term, when we need it we should have American debtors. That way Americans are funding the government's debt programs, rather than relying on foreign investors who may dump our debt or use it as leverage against us in international politics.

The details of this plan will need thorough analysis, in order to validate that it accomplishes the goals of (1) gradual change toward a more financially sustainable future (2) solvency for the existing social security insurance program (3) establishment of a solid personal retirement savings program, and (4) reduction of our reliance on foreign-owned government debt.

Honor top tax-payers at Presidential dinners

All Presidents hold many domestic events where the typical audience consists of top party donors, wealthy executives, powerful lobbyists, celebrities, leading politicians, media contacts, and so forth. If America were a business, this would be like the CEO hosting dinners for bankers, executives, and friends - but never inviting the top customers or salespeople.

America's finances are like a business - we bring money in to pay for the government, which then tries to invest in the common good in ways that no individual or private organization could. So why not have presidential dinners with the Americans who are most helping our nation's business of governance? I'm thinking of audiences with:

• Citizens who paid the most personal income tax last year
• Executives from the top ten corporate taxpayers
• Federal agency heads whose departments accomplished their goals and came in the most under budget
• Federal contractors who completed their projects the most under budget (and returned the money to the treasury)
• Whistle-blowers who exposed the ten largest amounts fraud and waste
• Representatives whose districts had the fewest earmarks or highest ratio of taxes paid to federal funds accepted

In other words, give access to Presidential influence through paying taxes and improving government performance, rather than raising thousands or millions for one candidate or party.

GM failed because its liabilities were based on negotiation, not productivity. Americans should learn a lesson.

I recently bought a new 2009 Buick Enclave and know that GM makes world-class cars. The bumper-to-bumper 5-year service warranty and On Star remote diagnostics show that they also know how to innovate and run a service business. Nevertheless, today GM filed for bankruptcy, while Ford and Toyota continue as independent car manufacturers.

General Motors was a phenomenal business that produced huge profits and benefits during its Alfred Sloan era. But eventually, the stakeholders (executives, unionized employees, dealers, politicians) placed liabilities on GM that paid out based on the results of negotiations, not productivity or business conditions. Thousands of dealerships built when GM had a 50% market share were unnecessary today, but state laws and inflexible regulations prevented their closure. Lifetime benefits and pensions negotiated when GM was young and growing cannot be sustained when it is older and shrinking.

Over the years, I’m sure that union leaders were congratulated for extracting “guaranteed” wages, executives got big bonuses for making promises that prevented a strike in exchange for liabilities pushed out far past their retirement, and politicians were re-elected for protecting their patrons. But any “guarantee” that is not based on productivity and a sound business model (that includes a reasonable profit and return on capital) is doomed to fail.

Americans should learn a lesson from General Motors. Our politicians make “guarantees” that lead to applause, re-election, and a comfortable consulting retirement. But these liabilities will not be sustained unless they are connected to productivity and a sustainable way of life, one that ensures our great-grandchildren will have the same blessings that we have.

P.S. GM is still a great company, but a horrible business.

Nothing is Too Big To Fail

Bloomberg reports that Nancy Pelosi “says GM is too big to fail”. Americans need to remember that nothing is too big to fail – including the United States of America. The responsibility to prevent failure is ours – to share the blessings of liberty among all instead of everyone accumulating as much as possible for themselves and then getting out before it all falls down.

Failure is not guaranteed when something is "too big" - it happens when the system is too complex or inflexible to adapt to external changes.