My blog, It Does Not Add Up, addresses fiscal and economic issues facing the United States at the present time.  I am concerned about our slow economic growth which deprives many middle- and lower-income workers of their proper share of our nation’s increasing prosperity.  I am also concerned about our large and rapidly increasing national debt which will create a huge cost burden on society when interest rates resume their normal historical levels.
Another critical problem, left over from the Great Recession of 2008 – 2009, is how to properly reform our financial system to avoid another meltdown as occurred in 2007 – 2008.  To me this is a more complex issue than slow growth and huge debt and therefore harder to figure out what to do about it.  I am always looking for new sources of information on this topic and feel that I have just discovered a good one.  It is a new book, “Five Easy Theses”, by James Stone, the founder and CEO of the Plymouth Rock Insurance Group and former chairman of the U.S. Commodity Futures Trading Commission (1979 – 1983).
According to Mr. Stone the Dodd-Frank Act of 2010 is too weak in certain respects and three additional reforms are badly needed to avoid a new crisis:

• The scale and risk profile of large banks should be reduced by having the Federal Reserve impose progressively steeper capital requirements as they grow larger.
• Hedge funds should be regulated like mutual funds under the Investment Company Act of 1940.
• The leverage of derivative markets should be reduced decisively with meaningful reserve requirements (which do not net opposite positions to zero).

Mr. Stone emphasizes that he is offering “best” solutions, not constrained by political reality. The financial sector’s share of GDP is now at an all-time high of about 8%.  The enormous wealth enjoyed by those at the pinnacle of finance will make them powerful opponents of meaningful reform.
But it always helps to know in what direction we need to go.

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In the great debate over slow economic growth and falling incomes of the middle class, the usual culprits are globalization, growth of technology and income inequality.

Just published in the latest issue of the Harvard Business Review, “The Great Decoupling: an interview with Erik Brynjolfsson and Andrew McAfee” is a more focused analysis of what is happening. These two technology experts note that both labor productivity and GDP are growing much faster than the growth in the number of jobs as well as median family income.  This is what they refer to as the great decoupling.  They are careful to point out that the same trends are happening in other developed countries such as Finland, Germany and Sweden.
They emphasize that the best response to this decoupling is to create an economic environment that’s conducive to innovation, new business formation, and economic growth.  In their opinion this means to focus on five things:

• Education. Primary and secondary education systems should spend more time on things that computers are not good at such as creativity, interpersonal skills and problem solving.
• Infrastructure. World-class roads, airports and networks are the foundations of growth.
• More entrepreneurship. Most industries and regions are seeing fewer new companies than in recent decades.
• Immigration reform. The U.S. needs to attract more of the world’s most talented people. Immigrant-founded companies have been great job-creation engines.
• Basic Research. Since companies concentrate on applied research, the government needs to step up support for basic research. Both total and nondefense federal R&D spending, as percentages of GDP, have declined by more than a third since 1980.

The recommendations of Messrs. Brynjolfsson and McAfee are quite sensible.  But they will be hard to implement overall.  More federal funding for both infrastructure and basic research will be very difficult in an era of tight budgets.
This is the challenge of our time.  We must become better prepared to prosper in an era of increasing global competition and rapidly expanding technology.  And do this in a tight fiscal environment.
A very big challenge indeed!

The Budget Committees for both the House of Representatives and the Senate have set a goal for balancing the federal budget over the next ten years.  As can be seen in the chart below, the two committees are in remarkably close agreement as to how this ambitious goal can be reached.  Once each chamber passes its own plan, then it will be up to a conference committee to produce a single unified plan.
The roughly $5 trillion in savings needed to get this done represents 10% of the approximately $50 trillion otherwise projected to be spent in the next ten years.  This means that the entire federal budget, including both discretionary and mandatory (entitlements) spending, will have to be examined for savings:

• Preserve the Sequester spending limits but give more budget flexibility to each department. Defense hawks complain that the military budget is too tight already. But every government agency can operate more efficiently if it has to, including the Defense Department. Some very good suggestions for doing this have been given by the Heritage Foundation.

• Social Security. Simple adjustments, such as eliminating the income cap, raising the age limits for eligibility and/or moving to a more accurate index for inflation, will make the Social Security trust fund solvent indefinitely into the future. Also, eligibility for Social Security Disability Income should be tightened to allow it to operate more efficiently.

• Medicaid. The current arrangement whereby state spending is matched by the federal government, at a set percentage, is costly to both. Turning Medicaid into a block-grant program would control federal costs and give the states a big incentive to be more efficient.

• Medicare. This is the toughest nut to crack. An attractive alternative, proposed by Avik Roy of the Manhattan Institute, is to migrate Medicare over time onto the Insurance Exchanges created by Obamacare, thereby providing seniors with the same level of subsidy as everyone else.

With both the House and Senate giving high priority to setting up a ten year balanced budget plan, it is critical to seize this opportunity to address an unusually difficult problem.  The future security and prosperity of our country depends on it!