How To Fix The Economy

If you haven’t noticed, the American economy is going to shit. The bailout isn’t working and things are just getting worse.

When I talked last year about fixing America’s problems I had no idea we were headed into the giant recession that we’re now facing. The bailout, designed to put more money in the hands of consumers, has just resulted in the banks tightening up loans and using the money for ill-conceived expenditures. AIG spent it on bonuses and vacations. BAC spent 10 million on a circus at the Super Bowl.

Instead of spreading the money, giving mortgages and creating jobs, the rich are simply hording money away. It’s having the opposite effect and things are just getting worse.

There’s a way to fix all of that though, and here’s how:

Eliminate the payroll tax for American Citizens
If you’re like me, the first thing you said when you got a job was “who’s this FICA guy, and why is he taking so much of my money?” Instead of throwing billions to the banks, that money would be better spent on subsidizing or eliminating the payroll tax. That would not only put extra money in the pockets of all hard working americans, but it would also give tax incentives to companies who hired citizens – as hiring a foreigner or off sourcing a $50,000 job would cost the company an extra $2-$3000/year in taxes. This would create spending a lot more than just giving money to banks would.

Let Companies Fail
I’m from the Detroit area, and the last thing I want to see is the auto companies fail – trust me. Sometimes though, you have to let companies go under so that better, more efficient ones can take their place. If Ford, GM, Chrysler, Toyota, and all the others closed their doors right now there would still be an auto industry – eventually. There will always be a market for cars, and where there’s a market there’s a way to make money. It’s as simple as supply and demand.

The unions are working and the current companies are spending way more than they can afford to. Instead of propping up them, the government needs to let them fail. As much as it would hurt people and I don’t want to see it, it needs to happen. We live in a capitalist society with a free market, and we need to let that free market run it’s course. It’s not the government’s job to prop up failing businesses. It’s not the government’s job to get involved at all.

If the car companies do fail, new ones will take their place. These new ones won’t have workers making $30/hour to unpack parts from a box, and they won’t be spending 10 million per year on Viagra for retirees. The same holds true for the airline industry.

Change the Incentive Programs
The entire financial industry needs to change the way it rewards employees. Portfolio managers need to be paid over the term of the fund they manage – not just short term results. Mortgage brokers need to be paid their commission in installments over the term of the mortgage, not all at once at closing. This stops people from selling $500,000 homes to people making $40,000/year. That’s what got us into this mess.

Switch to a Flat or Fair Tax Program
I’m a big fan of the FairTax, and I think now is the best time to implement it. Here’s how it works: Eliminate the state and federal income taxes and start charging a higher flat sales tax. Something like 10-12%, but only on non essential goods. This means no tax on things like water, electricity, groceries, gas, and toilet paper. The system taxes those who spend while putting more money in the pockets of those who scrape to get by from paycheck to paycheck. You might be asking yourself, what are the tax implications of earning over £100k? As soon as you start earning over £100,000, you gradually lose your £12,570 tax-free Personal Allowance, pound by pound.

Fix The Roads
2 things got us out of the first depression: The Assembly line and Highways. Unfortunately, nobody wants to do that type of job anymore. As more and more people struggle to find work though, that should change. We spent all of the 1920’s building roads and highways everywhere – and now they’re not only falling apart but they’re inefficient. Detroit is the “Motor City” yet we don’t even have carpool lanes. We have redundant streets and freeways with exits every 1/4 mile that only lead to unnecessary backups. Instead of paying for SuperBowl circuses, let’s spend that money on fixing our infrastructure. We need better, more efficient roads, and public transportation that works. In some places (like my home town) we need start filling in the millions of potholes that have cost me 2 rims on my Mazda so far this winter. Fixing the roads will not only save money in the long run and reduce carbon emissions, but it will create tons of new jobs that put money back in flow.

1 comment February 4th, 2009