The Unpopular 212^th Congress.  Ignoring the job they were elected to do – but still accepting full salary and life-long benefits – both parties have punted the country’s challenges to the people to decide. Congress has its peaks and valleys, but today they’re in the pit of the Grand Canyon with the lowest approval rating (16%) in history. Similarly, President Obama’s approval rating in a recent Gallup Poll was 43% – tied for the worst of his presidency. I don’t recall a time when both ends of Pennsylvania Avenue were so out-of-touch with the needs of the people. Even their best ideas are so mediocre that passing them would really be a defeat in terms of how much needs to be done to help the country.

     Compound Gridlock. Taxes and spending aren’t the only areas where the country’s challenges will go unaddressed. Jobs, energy, infrastructure, helath care, immigration, housing finance, and financial regulation policies are also likely to remain gridlocked in 2012. For example, Obama disapproved the Keystone XL pipeline which pleased environmentalists, but angered union supporters who desperately need the construction jobs. Similarly, uncertainty in U.S. oil and gas drilling decisions and the budget impasse over infrastructure delay construction projects while millions of workers draw extended unemployment. 

     Stuck in Their Job.  Among Americans who are employed, a Gallop poll reported that only 46% are happy – down from 60% in 1990 – as people cling desperately to unfulfilling paychecks. From office buildings to malls, few are willing to tell their boss to shove it. According to Business Week, since 2009 an average of one million fewer Americans per month have quit their jobs than in previous years – that means over 20 million Americans are stuck in jobs they ordinarily would have left. Combine that with 14 million unemployed and you have a lot of disgruntled Americans. If President Obama wants to keep his job, he’s got to find a way to provide better jobs for voters. 

     Speculation About 2013.  Guessing what will happen in 2013 will be 2012’s favorite topic. After the election, the lame-duck 212^th Congress will once again face the $3.8 trillion increase in income, capital gain and estate taxes that will take effect January 1^st if the Bush tax cuts expire. The tax strategy will also affect how Congress deals with the $1.2 trillion in spending cuts that kick in automatically in 2013 because of the Super Committee’s failure. Unemployment is likely to increase as government shrinks and uncertainty pushes small businesses into bankruptcy. Unfortunately, a close election – the most likely outcome – won’t decide anything and will leave the 213^th Congress with the same problems to resolve and the same political chasm to cross. At best it will be at least 18 to 24 months before we’ll see any stability in the federal government – and then it will be time for the 2014 mid-term election.

     The Washington Area Economy.  President Obama promised to change Washington – and he has certainly done that. Unfortunately, the changes weren’t what anyone wanted: the three largest budget deficits in history and coast-to-coast outcries for cuts. The once-booming Washington economy will feel the impact of the cuts more than other regions. After leading the nation in job growth in 2010, the Washington area dropped out of the top-10 fastest growing metropolitan areas in 2011. Pay freezes and workforce reductions have caused anxiety among government employees. Some federal agencies are cutting-back in anticipation of budget cuts, so government contractors are reducing staff through early retirements and layoffs. Economists predict the Washington economy will about grow at about the 2% national rate – but that growth will reverse in 2013 when the federal cuts take effect. Since the area gets about 15 cents of every dollar in federal spending (it has less than 5% of the population), it can expect to be hit with 15 cents of every dollar reduction. 

      Government Contracting Outlook.  In 2012, uncertainty will have a bigger impact than declining budgets – the big cuts don’t hit until 2013. Several factors will cause the government contracting industry to shrink and consolidate. First, of course, across-the-board budget cuts, including defense, make organic growth difficult. This has reduced valuation multiples for government contracting firms significantly. Second, government spending actually will grow in niche sectors like cloud computing, cyber-security, identify management, and health care – which makes small businesses in those areas prime acquisition targets. Third, the owners of some companies may conclude that they would rather exit than continue operating in what will be an austere and highly competitive market. 

     What Can You Do?  First of all, vote in November according to the policies you want to see. In the meantime, set aside your fears and take action to thrive in 2012 even as Congress does nothing – you don’t have the luxury of doing nothing since you can’t borrow $15 trillion to live. In light of the tax changes likely in 2013, it would be prudent to consider that 2012 will have the highest deductions and lowest overall tax burden in your remaining life. For those who manage a business, it would be wise to:

• Ramp up customer service – help them succeed despite budget cuts
• Reduce operating costs wherever possible, and invest only in areas with positive cash flow
• Focus on products and services with growing demand – phase-out ones whose demand is waning.

These are good things for businesses to do at any time, but they are survival tactics during times of contraction like the Washington area will face in 2012-13. Good luck!

Anger at Washington. Unfortunately, Washington seems deaf to the protesters and everyone else. Two bipartisan committees produced credible proposals – but even they were ignored. Who can blame workers, business owners, and investors for being angry with the President and Congress after they threatened to shut down the government several times, lost the country’s AAA credit rating in August, and had a “Super Committee” meltdown in November. The anger toward Washington over the country’s sorry state has been a topic at many seasonal celebrations. The president and Congress seem oblivious to the pain their partisan rhetoric and lack of action inflicts on the people who elected them.

The Gap Between Rich & Poor.  Economic inequality also fuels the street protests. The social contract isn’t working: prosperity hasn’t trickled down to Main Street. In 2008, the income of the top 10% of Americans increased to nearly 15 times that of the bottom 10%. According to the Washington Post, members of the U.S. House of Representatives have done pretty well too: their average net worth has risen to 36 times the average American’s net worth. The income gap continues to widen because skilled workers and companies are earning most of the wealth created by technological progress. To reverse the trend, Congress must implement social and tax policies that offer more opportunity and training for those at the bottom. According to the International Monetary Fund (IMF), countries with a narrow income gap enjoy longer economic expansions. Recoveries fizzle in countries with a wide gap because they fall into gridlock and can’t enact the tough policies required to spur growth. That description certainly fits the U.S. Congress.

Tax the Rich.  The shift toward inequality has been happening for 30 years. But when people are doing okay, the fact that some people are doing better doesn’t bother anyone. However, when people run into rough times, inequalities that were once tolerable become offensive. For the most part, Americans see the rich as deserving people who pioneer technologies, run companies, or excel as entertainers or sports heroes. Few resent Bill Gates, Warren Buffet, Oprah Winfey or Kobe Bryant because of their wealth. Moreover, the rich already pay most of the taxes. The Congressional Budget Office says the richest 10% earned 38% of the income and paid 55% of all federal taxes in 2007; while the poorest 40% paid only social security and Medicare taxes – if they worked at all. To balance the federal budget everyone must pay more – especially the rich.

The Tea Party & Occupy Wall Street Movements. Recently, Wall Street has had record profits while middle- and low-income people are left holding the unemployment bag. The result is TPers on the right and OWSers on the left, and a President whose Gallup approval rating is just over 40%. As the table shows, the two groups share a belief that our economic system is broken, and that Congress favors the special interests that get them elected. Although specifics differ, both sides want big changes.

 Politicizing the Protests.  Even worse than not hearing the TPers, OWSers, Main Street, and two bipartisan committees, Democrats and Republicans are using the protests for political gain. President Obama, who has bashed business and promoted class warfare since his election, is courting OWSers to revive his sagging re-election hopes. And Republicans are sympathizing with both TPers and OWSers in order to win votes. Several misguided regulations, written in anger by Congress, have handcuffed banks and companies in their ability to grow. To be sure, the banking industry messed up horribly. But people still need a place to safely park retirement savings; and companies – you know, the organizations that create jobs – need bankers to finance growth. Unfortunately, it’s unlikely that the president and Congress will stop posturing for the 2012 election long enough to do something meaningful this year.

The Solution.  Hopefully, we’ll elect a courageous President and Congress next November who put the American people ahead of reelection. First, they would take job-creating actions like approving the Keystone pipeline, funding new infrastructure projects, and reducing regulations. Second, they would boost growth through policies like less short-term austerity and more long-term fixes to entitlement programs (e.g., a higher Social Security retirement age). Third, they would make the rich pay their fair share, but in a way that makes economic sense like eliminating deductions and lowering marginal rates. Fourth, they would implement use-based taxes like a gasoline tax to pay for roads and bridges, and broaden the tax base with a reasonable value-added tax. Lastly – and most importantly – they would tell the truth about how the country got into such terrible shape. Today’s huge federal and state debts were caused less by the bailouts and recession; and more by politicians spending too much in the boom years, recklessly cutting taxes, and making unaffordable promises for retirement and health care. Weak growth and high unemployment – especially among the young – will continue to inspire the protesters. Since much of the unemployment is due to irreversible technology advances and globalization, economic growth isn’t a panacea: broad retraining of unemployed workers is needed. The bottom line: I am forever grateful to the TP and OWS protesters for making a bolder statement than I’m willing to do as a member of the silent majority – on the other hand, I vote every year and I hope you do too.

Specifics of the Increase.  The governor’s recommendation, which the Maryland legislature will consider early in 2012, would increase the tax by five cents in each of the next three years from 23.5 cents to 38.5 cents per gallon. O’Malley said: “The fact of the matter is, it costs more today to paint the Chesapeake Bay Bridge than it did to build the first span (in 1952).” Maryland set the tax at the current rate in 1992 when gasoline was $1.10 a gallon – at the time, 23.5 cents per gallon was a 21% tax. Today, with gas at $3.50 per gallon, Maryland’s gas tax has dropped to just 6.7%. Assuming gas prices don’t change over the next three years, the new tax would be 11% when fully implemented. The increase would raise $491 million annually to be spent entirely for transportation repair and construction. By comparison, the federal gas tax was set at its current 18.4 cents per gallon in 1993. At that time the federal gas tax was 17% – today it has dropped to 5.3%. It’s no surprise that our national transportation system is literally falling apart, and DC-area roads are the country’s most congested.

The Opposing View.  The Governor’s announcement got blasted from both ends of the political spectrum. Pro-business advocates say the trucking industry and businesses that rely on transportation will see increased costs at a particularly inopportune time. And liberals say the proposed increase would strain workers who are already struggling with high unemployment and falling home prices. There hasn’t been a “good” time to increase state or federal gas taxes in nearly 20 years! 

Why It’s a Good Idea.  The short-term hardship of higher gas prices must be balanced against the urgent need for massive transportation improvements. The consequences of not investing in infrastructure will have even greater costs in terms of declining highway safety, dirty air, reduced global competitiveness, and continued high unemployment. Infrastructure must be part of the debate about what we expect our government to do, and how we are willing to pay for it. 

Our Crumbling Infrastructure.  According to a study by the Urban Land Institute (ULI), the U.S. is falling behind the world in rebuilding its deteriorating and overloaded transportation system because of often-postponed maintenance. The Surface Transportation Act, which provides federal funding for bridges and highways, expired in 2009 and Congress is gridlocked (what’s new?) over how much to spend and how to pay for it. Specifically, according to the ULI, the U.S. isn’t keeping up with three economic competitors: China, India and Brazil. China is spending $1 trillion over five years (3.4% per year of its $5.9 trillion GDP) on highways, high-speed rail and other infrastructure. India is near the end of a 5-year, $500 billion (6.3% per year of its $1.6 trillion GDP) infrastructure investment and will double that by 2017. And Brazil will spend $900 billion (10.7% per year of its $2.1 trillion GDP) on infrastructure by 2014. Incidentally, their economies are growing two to five time faster than the U.S. annual rate of 1.7% (Brazil=3.6%, India=6.1% and China=9.0% annualized GDP growth) according to The Economist? 

How Much is Required?  The ULI says the U.S. needs to invest $2 trillion over the next five years (2.8% per year of its $14.3 trillion GDP) to rebuild roads, bridges, water and sewage systems, and dams that are near the end of their useful lives – which probably would require the federal gas tax (currently 18.4 cents per gallon) to double. Where will a bankrupt federal government find that money if not through increased gas taxes which historically pay for such projects? Whether we fund infrastructure investments through gas taxes or pay more because of worsening traffic delays and potholes is a choice. Governor O’Malley said: “Bridges aren’t like trees – they don’t grow stronger with age – they become brittle and crumble. That’s why they need to be repaired before moms and dad die on their way to work when they collapse in rivers;” – the later remark referring to the 2007 collapse of an interstate highway bridge near Minneapolis that killed 13 people and injured 150 others. 

Higher Prices Force New Choices. Increasing the gas tax is a simple way to rebuild our infrastructure – and deal with energy issues and global warming at the same time. Of course, higher gas prices will hurt economically – and that’s a good thing in the long run because it will change behaviors. When gas costs more, people will buy more hybrids and fewer gas-guzzling SUVs. They will drive less, and use public transportation and carpools more. With higher gas taxes, drivers will pay the real cost of the roads they drive on, highways will be less congested, and carbon emissions will drop. Companies will be incentivized to build more efficient cars and trucks, develop synthetic fuels, and manufacture goods closer to their U.S. buyers. It’s no mystery that cars in Europe get better gas mileage and their public transportation is vastly superior – their gas taxes make filling up twice as expensive as in the U.S. 

How to Get There From Here.  With gas near $4 a gallon, you might say we can’t afford to pay more – and many people can’t. Furthermore, in these anti-tax times, passing an increase will be controversial. But by phasing in a tax increase over three to five years, families and businesses would have time to adjust their lifestyles and business practices. As people change their driving habits, oil imports would drop, which would keep money and jobs in the U.S. instead of sending them to unfriendly suppliers in the Middle East and Venezuela. 

Boost the Economy and Produce Jobs.  Tom Donohue, President of the U.S. Chamber of Commerce, said that increased spending on infrastructure was “not just transportation for transportation’s sake. Without robust growth, the U.S. will not create the 20 million jobs we need to replace those lost in the recession.” For example, the $491 million Governor O’Malley expects to raise annually to fund transportation projects will create about 5,000 new jobs in Maryland. Without highway improvements, businesses will be forced to divert resources to pay for vehicle repairs and transportation delays caused by bad roads – wasting money that could be invested in expansion and new jobs. 

Doing Nothing is the Most Expensive Option.  While Congress debates the country’s transportation needs, crumbling roads, bridges, railroads and transit systems cost the U.S. $129 billion a year according to the American Society of Civil Engineers (ASCE) – $97 billion per year in additional vehicle operating costs and $32 billion in productivity loses due to traffic jams. Slashing infrastructure investments as Congress has done recently will have an enormously adverse impact on the economy – especially middle class workers. The ASCE said that if investments in transportation are not made soon, the wasted costs will grow to $430 billion per year within ten years.

Come On, Congress – Find Some Courage!  I’m usually against tax increases of any kind – but I’m definitely for this one. Allowing our infrastructure to deteriorate by refusing to raise the gas tax for nearly 20 years has been fiscally irresponsible since the tax is the primary revenue source for the Highway Trust Fund. Historically, the federal transportation program has been specified in legislation that budgets money for a 6-year period to give states time to design and complete construction projects. It looks like Maryland is finally addressing its state-owned infrastructure deficiencies. Come on, Congress…find the courage to make a smart change about our interstate highways and other transportation systems – fund improvements and create jobs with an increase in the gas tax.

      Is the U.S. Going Bankrupt?  When you own stock, the company will mail you a glossy annual report that shows income and expenses, and describes future prospects, usually in glowing terms.  If the federal government were a Fortune-500 company, its annual report would say USA Inc. was on the brink of bankruptcy because:

• Expenses exceeded income by $3 trillion in 2010 and 2011,
• Debt increased from $10.0 trillion to $14.8 trillion in the last five years,
• Standard & Poors downgraded its bond ratings for the first time in history, and
• Customers are complaining, sometimes violently, that they want to get more and pay less.

The government isn’t a company, of course, so it can’t outsource or shutdown under-performing units like Medicare and Medicaid (the U.S. spent twice as much per-capita on health care as Sweden, but has a shorter life expectancy) or the Education Department (the U.S. spent more per-student than any other country, yet our teenagers rank 25^th in math skills). If I was a shareholder in such a company, at a minimum I would expect the Board of Directors to take decisive action. But the Board of Directors of USA Inc. (i.e., Congress) is gridlocked on how to increase income, cut spending, or curtail entitlements – all of which are essential to resolve the crisis. Future government policies and taxes are uncertain.

    Congress Plays Russian Roulette.  The truth is Congress has been over-spending, under-investing, and promising unsustainable entitlements for decades. In the August agreement that avoided default on the national debt, neither Republicans nor Democrats sacrificed their sacred cows – Republicans avoided tax increases and Democrats avoided Medicaid, Medicare or Social Security cuts. President Obama hit the nail on the head when he said: “Our economy didn’t need Washington to manufacture a crisis and make things worse.” The willingness of some Congressmen to threaten default on federal bonds, pensions and paychecks to push their agenda is a frightening new low in partisanship. Both parties claim they want to create jobs, but neither blinked when the Federal Aviation Authority’s spending authority was allowed to expire, causing thousands of workers to be laid off and airport construction projects to be halted. Everyone focuses on the November deadline for the Congressional Super-Committee, but that committee is struggling – the members prefer rhetorical fairy tales to hard-nosed budget decisions. Because of cutbacks, government employment is down everywhere, particularly in the Washington area (my home) which people thought was recession-proof. The future economy across the country is uncertain – even more so in my hometown.

      Political Extremism.  Extreme partisanship isn’t surprising given the mixed messages citizens are sending. On one hand, the Tea Party bashes big government, fights for individual freedoms, and pushes the Republican Party to the right. On the other hand, the Occupy Wall Street movement bashes big business, fights for social justice, and pushes the Democratic Party to the left. The two extremes are incensed by myths about painless solutions like eliminating government waste and taxing millionaires – both are good ideas, but neither is a panacea. President Obama empathizes with the Occupy Wall Street folks, of course, but at the same time expects millions in donations from Wall Street for the 2012 Presidential campaign. The positive side of the protest movements is that they highlight the misery millions of Americans are feeling from the economic slump. But to effect real change in a real democracy, we need real politics – not political extremes that perpetuate Congressional gridlock. I don’t see an end to the uncertainty about what Congress will do – nothing looks like their most likely action.

     Volatile Financial Markets.  Talk about uncertainty: the stock market has gone up or down more than 1% in eight of the last ten working days. The civil war in Congress creates two problems for American business: paralysis and uncertainty. At the same time, U.S. companies have high profits and cash reserves, but nowhere to spend the money – Apple alone says it has $76 billion in the bank. They are making conservative decisions just like I am. Why? Business leaders blame the dysfunctional Congress for their reluctance to hire and invest. For example, in a Brookings Institution poll 33% of U.S. business leaders said political instability is a major constraint on hiring – by comparison the equivalent result in France was 15%. These leaders say they would tolerate higher taxes if the increases were linked to a broad plan that clarified the country’s policies for taxes, Social Security, health care, the environment, etc. Making matters worse, President Obama pushes his $474 billion “American Jobs Act” and begs companies to hire employees, but in his next breathe he vilifies the banks, insurance companies, oil industry, and other businesses he expects to do the hiring. He should heed former President Clinton who said: “I don’t understand how you can love jobs, but hate the people who create them.” The sooner Obama realizes how his rhetoric contributes to unemployment, the sooner the country will return to growth. The uncertainty is the mortal enemy of corporate investment and hiring.

      Uncertain Weather.  Uncertainties aren’t limited to politics – even weather is more unpredictable than ever. February’s snowmageddon in Washington, floods in Vermont, droughts and wildfires in Texas, more than 1,000 tornadoes across the U.S., a melting Arctic ice cap – our world is tearing itself apart and we’re doing nothing about global warming. The National Oceanic & Atmospheric Administration (NOAA) says warmer temperatures produce more severe and frequent weather extremes. NOAA reported 2010 as the hottest year in the 100+ years it has kept records – 2011 is likely to beat the 2010 record. Extreme weather is destructive and deadly: 2011 was first year in history with ten weather events that each caused over $1 billion in damage. Despite visible and expensive signs of global warming, the U.S. is unlikely to limit greenhouse gas emissions before 2013 – if then. Many Congressmen and some scientists deny that human activities contribute to global warming. As a PhD scientist, I don’t know what causes global warming, but it’s suicidal (and, quite frankly, stupid) to do nothing about it. Last month my wife and I had over $10,000 in flood damage in our house – the first damage in the 36 years we’ve lived here. Weather uncertainty is scary, expensive and unlikely to abate.

      Cyber Insecurity.  I don’t even feel safe in my own home these days – more because of cyber-attacks than home intrusions. Twice this year hackers penetrated my wife’s AOL account and blasted out an email asking friends to wire $1,000 because we’d been robbed in London (we haven’t even been to London). Since the Internet’s early days, hackers have tried to penetrate government, industry and personal computers. But hacking has changed from a game for geeks to a way for countries to attack each other and criminals to steal. The lack of federal standards and oversight leaves us open to cyber-attacks on the power grid or individual power plants. Unfortunately, there’s no way to know what systems have been penetrated. Even as I type these words, I wonder if dangerous sleeper code is in my computer that could destroy my records and the draft of my new book. On a cyber-warfare level, I wonder if the U.S. is as good at hacking as the Chinese. More uncertainty.

     Bottom Line. As a superpower, the U.S. isn’t so super anymore. Most people agree the 20^th century was American’s century - just like Great Britain dominated the 100 years before World War One. It now looks like the 21^st century will belong to China. With a president and Congress whose primary goal is to get re-elected, few people have confidence in their ability to fix trillion-dollar deficits, persistent unemployment, under-performing schools, energy policies that ignore global warming, crumbling infrastructure, or a moribund housing industry – and I probably left a few things out. The country is likely to crawl through the 2012 election hoping things will change thereafter. History will remember the 112^th Congress as the “Nero Congress” that played foolish partisan games while the country’s economy went up in flames and millions suffered. This sure doesn’t feel like the country my father was so proud of. As Bill Gates said: “Where’s all that good stuff we used to make and other people copied?” On the other hand the 112^th could be the “Hero Congress” that turned the country toward prosperity. I’d like to believe that, but I’m hedging my bets until I see hard evidence. I know I sound negative, but I’m really scared about my future. How about you?

   To maintain its position as the world’s most innovative and productive economy, the U.S. must create millions of jobs in new industries and educate people to fill them! The $447 billion so-called “American Jobs Act” that cuts payroll taxes, extends unemployment benefits, and builds a few bridges and schools does neither. A national educational policy from Congress would help, but such a policy is as unlikely as a Federal budget for FY2012 or a national energy policy, immigration policy or transportation policy. But I digress – this article is about education. Educating people means more than K-12 improvements and universal access to college, it requires a life-long training system that also includes:

• A revitalized Head Start Program for pre-school kids,
• Vocational options in grades 9-12,
• Mandatory retraining linked to extended unemployment benefits, and
• Extensive career refreshment training (like CPAs and attorneys already have).

Unfortunately, today’s school reforms are driven by educational administrators trying to cut budgets, politicians seeking reelection, and religious leaders spreading their beliefs – Who is focusing on training people to prosper in an ever-changing world? Businesses and governments must work together to make the necessary changes and pay for them. 

   U.S. Educational System Falls Behind. We live in a fast-changing technology-driven era, yet our educational system is an industrial-age relic. In the industrial age, learning pretty much ended when we finished high school or college. That model worked okay when people had the same job for their entire lives. But it fails miserably in an economy where new technologies can obliterate entire industries and leave workers unemployed with antiquated skills – look at printing, for example. In campaign speeches, President Obama says: “America won’t settle for #2.” But in fact the U.S. ranks #11 in Newsweek’s list of the top 100 countries. American students lag behind students in Singapore, Canada, Japan, Taiwan, South Korea and five other countries in standardized math and science tests. Referring to the College Board’s grim report of a steep decline in Americans completing college, Arne Duncan, U.S. Secretary of Education, said: “We’ve flat-lined and other countries pass us by.” Once the world leader by a wide margin, in 2009 the U.S. dropped from 12^th to 16^th in that category. “The country that out-educates us today will out-compete us tomorrow,” Duncan added. A study by McKinsey & Company agreed and said: “the widening gap in education between the U.S. and other countries is the economic equivalent of a permanent recession.” China, graduates more engineers and scientists every year and registers more patents than the U.S., two factors that are likely to propel their GDP past the U.S. by 2018. 

   Recruiting & Rewarding Teachers.  Multiple studies show that the quality of teachers is more important to learning than budget-per-student, class size, or curriculum. You’d think that would push Congress into action to make U.S. teachers the best in the world. The problem starts long before a teacher enters his or her first classroom. In Singapore, the mandatory teacher training program (the U.S. has no equivalent) only accepts teachers who graduate in the top third of their class. In the U.S., only 23% of 2010’s new teachers were in the top third of their class. One issue is evaluating teacher performance to reward good teachers and fire bad ones. Race-to-the-Top, a $4.3 billion program funded under the 2009 Stimulus Act, rewards states that evaluate teachers in better ways. In addition, billionaires like Bill Gates and Mark Zuckerberg have made huge donations to public schools to promote pay-for-performance programs. They believe that merit pay creates the same incentives for teachers that bonus programs do in the private sector. Such cooperation between government agencies and businesses give cause for hope, but states are ignoring the No Child Left Behind Act because Congress has declined to fix the parts that aren’t working. 

   The Problem Begins at Home. On the other hand, don’t expect teachers to work miracles. There is little a teacher can do to deal with the challenges students face at home such as abuse, single-parent households, and mental health issues. The growing poverty rate exacerbates the problem because poverty limits a child’s ability to learn in subtle ways like untreated eyesight or hearing problems, and chronic asthma. Attacking teachers helps people feel like reformers, but the problems begin before children go to school. So life-long education must start by helping pre-schoolers in struggling families. 

   Are Charter Schools an Answer? President Obama supports charter schools (taxpayer-supported schools that operate outside the public school system) and wants more. He said: “state limits on charter schools aren’t good for our children, our economy, or our country.” About 1.5 million children, roughly 3% of all students, currently attend a charter school. Nationwide, nearly half of all charter schools have test scores the same as the local public schools; one-third have results that are worse; and 20% outperform nearby public schools, especially in cities – but that is probably related to the students they attract. Charter school students are generally highly motivated – after all, their parents endured a difficult admissions process just to get them in. But preferentially having better students in charter schools may leave inner-city public schools with the students who are least able to learn and most susceptible to dropping out. Charter schools may have a long-term role, but they’re not a panacea. 

   The Evolving University System. Today, U.S. colleges are the best in the world – they hold the first five spots in the Times’ Higher Education Rankings, and 18 of the top 25 positions. U.S. colleges employ 70% of the living Nobel prize-winners in economics and science, and publish a high percentage of the technical articles in prestigious academic journals. Their excellence enables U.S. colleges to attract extraordinary numbers of foreign students who pay full tuition. So where’s the problem? We’re educating the world at the expense of our own citizens! For decades, college costs have grown faster than American’s ability to pay them. Household income has grown 6.5 times since 1970, but the cost of attending a public college has increased by a factor of 15 for in-state and 24 for out-of-state students. Like governments, administrative costs per student have skyrocketed by 300%; and like businesses, many college presidents act like corporate CEOs with annual salaries, perks and staffs to match. 

   Attracting the Best & Brightest. Unfortunately, the U.S. won’t be the world’s largest economy for much longer – China’s climb to #1 is just a matter of time. That isn’t a problem in itself, except it means the U.S. can no longer rely on its massive economy to attract the world’s brightest and most ambitious entrepreneurs – they have other options. The U.S. needs to create several new industries that employ millions of people to get us out of the current financial mess – and smart immigrants would help. Since 9/11, we’ve made it very hard for them to immigrate. A good place to start is for Congress to endorse the idea that every non-citizen who earns a college degree in the U.S. should have a green card stapled to his or her diploma. The cost of that would be zero and the impact on job creation would be enormous.

   Reduced Emphasis on College. “Go to college!” has been a mantra in my family for generations; but with the rising cost of college and changing nature of jobs, a 4-year degree doesn’t work for everyone. A recent Harvard report argued that trade apprenticeships, vocational training, and technical training outside classrooms would grow the U.S. economy and reduce unemployment. Many of the four million job openings that have been unfilled more than 30 days require technical training, – not a 4-year degree. Public school systems and businesses must cooperate to offer vocational and technical training in high school, augmented by work-study programs. Such an approach will provide some income and simultaneously show high school students what businesses want and how to market their skills. 

   Unemployment and Re-Education. Bureau of Labor Statistics (BLS) projections confirm the need for alternative educational programs. For example, food service and financial examiners are among the professions the BLS projects will provide many new jobs – neither requires a college degree. Health care is another industry with favorable job creation prospects. As pressure to reduce costs intensifies, tasks previously performed by doctors and nurses are now being done by physician assistants, medical assistants, and physical therapists. Unemployment is the Achilles heel of the U.S. economy right now, so job creation must be the focus of educational initiatives. Some job hunters are adapting by settling for positions that don’t pay as much as their former jobs, or that stretch their skills. This’s where enlightened government policies would help. Specifically, anyone unemployed beyond the core 26 weeks should be required to participate in a training program as the condition for unemployment payments up to 99 weeks. Further, businesses should provide training that suits their employment requirements – free-of-cost to the government and the unemployed students. 

   Make Education a Game.  One popular reform is making learning an entirely on-line experience and declaring textbooks to be obsolete. In professional training, on-line media have widely replaced presentations and classrooms. From pre-school to grad-school, students find on-line training to be more engaging because it cultivates imagination, curiosity and gamesmanship – three features missing in the old-fashioned textbook-and-test model. These three features are common in the multi-player, on-line, role-playing games that my grandsons are hooked on. In on-line media, learning and testing happen concurrently as students find, evaluate and share information. Unlike midterms and final exams, games encourage trial-and-error and make learning fun. Basic subjects such as math, science and social studies fit neatly into a virtual-game world – and reading skills improve as a by-product. Furthermore, students learn problem-solving, rule-based thinking, and strategic planning skills that are difficult to get out of a textbook. Admittedly, discussion subjects (e.g., humanities) are a stretch. For example, it will be more difficult to grasp the subtleties of Shakespeare=s Julius Caesar in an on-line environment. Gamified learning is still experimental, but it illustrates the kind of improvements our educational system needs to revitalize the economy and re-employ Americans in today’s technology-driven times.

     Facts of the Matter. It’s politics as usual in Washington, but with higher-than-usual stakes. The debt ceiling, now $14.3 trillion, has been raised 39 times since 1980 including three times under President Obama, the last in October 2010. The Treasury Department says it will run out of cash August 2nd unless the ceiling is raised. In reality, the debt ceiling has nothing to do with budget deficits. Congress determines tax and spending levels during the annual budget process. For them to refuse to let Treasury borrow to pay for spending that Congress itself has authorized is ludicrous. Furthermore, even $3 trillion in cuts over 10 years is just a band aid – that’s only $300 billion per year when the 2010 deficit was $1.6 trillion! 

     Political Rhetoric.  President Obama himself is an example of the rhetoric that always surrounds debt ceiling debates.  In 2006 then Senator Obama voted against George W. Bush’s request to raise the debt ceiling saying: “The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. Increasing America’s debt weakens us domestically and internationally. Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren.”  Apparently, Obama has acquired new insights now that he is the president. 

     The Sky Won’t Fall. The odds of the U.S. actually defaulting are small.  Facing the deadline, Congress will find an awkward compromise (to do otherwise would be irresponsible), but don’t expect a grand solution. Instead, they will leave the core problem to be solved another day, and the economic and employment damage from their bickering will stay with us.  Even if they don’t raise the ceiling, either of two strategies could prevent the sky from falling. First, don’t be surprised if Treasury Secretary Geithner miraculously finds new ways to juggle cash flow and delay default by several days.  And second, Obama could avoid a meltdown by using the 14th Amendment which says: “the validity of the public debt of the United States…shall not be questioned” to justify ordering Treasury to pay the bills regardless of the ceiling. Republicans would howl about the president deciding which law to enforce, but the debt ceiling crisis would be over.  Unfortunately, it’s likely the U.S. will begin fiscal year 2012 on October 1st with a big debt and no budget because Congress failed to do its job – again. 

     Cyclical and Structural Deficits. The annual budget deficit is the sum of two parts: cyclical and structural.  At low points in the business cycle (like today), unemployment is high, tax revenues are down, and entitlement spending rises.  The reverse happens in cyclical peaks like the Dot-Com boom during Clinton’s presidency. By definition, cyclical surpluses during peaks entirely offset cyclical deficits in bad times.  In 2010, the U.S. government had a $1.6 trillion deficit. Economists say $900 billion of that deficit was cyclical, and $700 billion was structural.  Core spending exceeded core revenues by $700 billion even after the recession and the Stimulus Act were excluded. 

     How Did We Get Here? In 2001, just 10 years ago, the U.S. had a budget surplus of $127 billion, and the Congressional Budget Office projected a surplus of $2.3 trillion in the years 2002-2011. How did a $2.3 trillion surplus become a $10.4 trillion deficit? The New York Times attributed the $12.7 trillion swing about equally to the recession, President Bush’s policies, and policies enacted or continued by President Obama. The specific drivers were:

•      Revenue decline during recession        $ 3.6 trillion (28%)
•      Defense spending increases                   $ 1.9 trillion (15%)
•      Bush tax cuts in 2001 and 2003           $ 1.7 trillion (13%)
•      Increased interest on national debt      $ 1.4 trillion (11%)
•      Non-Defense spending increases           $ 1.3 trillion (10%)
•      Obama tax cuts                                        $ 1.0 trillion (8%)
•      Obama stimulus spending                      $ 0.8 trillion (7%)
•      Medicare Part D spending                      $ 0.3 trillion (2%)
•      Other factors                                            $ 0.7 trillion (6%)                 

Interestingly, the TARP bailout of banks and automakers isn’t on the list since it produced a profit for the government. The ugly truth is nearly three-quarters of the representatives and senators who are bickering about the debt ceiling voted for one or more of the legislative actions that contributed to the $12.7 trillion swing. 

      Governing Through a Rearview Mirror. The U.S. is having a tough time today because Congress governs through a rearview mirror.  They debate things that have already happened (e.g., 9/11, huge windfall, or severe economic downturn) instead of using foresight to avoid such situations. Politicians are swayed by special-interest demands like the feel-good (but unrealistic) pledge not to raise taxes, and the Tea Party’s ranting about excessive spending instead of building the foundation for a strong economy. Today, congressional leaders are addressing huge deficits, high unemployment, and a moribund housing industry in ways that are likely to exacerbate the jobs deficit. What they need to do is make cuts and investments that stimulate growth and provide clear policies for education, energy and immigration. 

     Conclusion. The problem we have today isn’t too much government – it’s too much bad government! There’s no doubt that budget-cutting is tough – it forces choices no one likes. Mindless across-the-board cuts kill innovation, diminish the effectiveness of government, damage the morale of public servants, and erode citizens’ confidence. Such cuts produce a bunker mentality where spending for management reform, new technologies and training is considered a luxury.  Identifying potential savings through policy changes and process improvements is the easy part. The challenge is to generate the collaboration and creativity to transform ideas into results. Successful businesses use budget cuts as a catalyst for change. They invest to promote growth, eliminate program overlaps, share back-office services, simplify the organization, reduce energy usage, and monetize assets. It will be interesting to see how this all plays out over the next two years. Will the eventual budget agreement include investments that promote growth and cut the job deficit; or will the cuts increase unemployment, retard economic growth, and adversely affect the performance of government agencies?

   Pay Differentials. Companies can build factories anywhere in the world, so the best hope for U.S. workers is to be so skilled and so productive that they justify the pay differential they earn versus workers in Mexico, China and Vietnam. They must produce complex products that can’t be manufactured in low-wage countries and out-hustle foreign competitors with innovation.  China’s pay advantage over the U.S. is eroding because their wages climb almost 20% a year, while U.S. workers are increasingly willing to accept non-union wages and benefits. After adjusting wages for superior U.S. productivity, China’s average wage is still roughly half the wages of workers in Mississippi, South Carolina, and other right-to-work states. 

   Off-Shoring Loses Its Luster. Moving manufacturing to China isn’t the no-brainer it once was. Multinational companies like GE, Caterpillar and GM will continue to build factories around the world – not to ship back to the U.S., but because that’s where demand is growing. On the other hand, companies are likely to build factories on American soil when the goods will be sold in the U.S., often wooed by incentives from state governments. Today, efficiency is increasing steadily which makes labor a smaller factor in overall costs. Furthermore, long supply chains are becoming more risky. When oil prices rise, transportation costs increase; and flu epidemics, tsunamis and other disasters also can disrupt supply chains. Companies no longer automatically manufacture in the country with the lowest labor costs.

   Not a Panacea. A manufacturing renaissance would simulate the U.S. economy, but don’t look for it to be a panacea for unemployment. The idea that manufacturing is the core of the U.S. economy is a relic from the past. Before World War II, agriculture seemed to be the economic mainstay, but then agricultural employment fell dramatically and workers moved to other fields. Similarly, manufacturing workers must switch to jobs in growth sectors. Like agriculture, manufacturing companies produce more with less people these days. Manufacturing has been steady at 15% of GDP despite a 40% decline in workers from the 1979 peak of 20 million. That’s too bad since factory jobs pay better than other jobs that people without college degrees can get. However, even if a manufacturing renaissance doesn’t help unemployment much, it will bolster the economy by increasing exports, shrinking our $600 billion annual trade deficit, and helping to pay our debts to the world.

   Export-Led Recovery. The U.S. economy could grow quickly by increasing exports, which are just 12% of the U.S. GDP but 25% of global GDP. The idea that exports could lead the recovery strikes some people as a pipedream. They pessimistically point to a decline in manufacturing, but don’t realize the U.S. still ranks third in exports behind China and Germany. Historically, U.S. exports have grown because companies export new products, rather than by regaining market share for old products.  Census data show only 1% of U.S. companies are exporters – 99% focus entirely on domestic sales. While U.S. consumers struggle with high unemployment and debt, demand in many other countries is booming, and that demand can translate into job growth. To boost exports, business-friendly policies are required in (1) free-trade, (2) energy, (3) labor relations, and (4) assistance for companies that export. Let’s take a closer look at these areas to see what Obama administration and Congress could do to stimulate for export and job growth – and reduce our budget deficit and national debt at the same time! 

   Free Trade.  President Obama says he wants to expand exports, but several of his decisions actually have inhibited free trade. To appease union supporters, Obama imposed a 35% tariff on tires from China, supported Buy-American provisions in the Stimulus Act, and was silent when Congress shut the border to Mexican trucks. The president also has done little to push Congress to pass agreements with Panama, Colombia and South Korea that would expand trade. Historically, American presidents from both parties have championed free trade because it creates jobs, lifts millions out of poverty, and reduces consumer prices. Globalization has made economies more interdependent than ever, with the supply chain for a car or plane made in the U.S. often using components manufactured in other countries. So Congress and the Obama administration must end protectionist policies and promote growth through free trade. 

   Energy Policies.  Congress has been looking through a rearview mirror in its feeble attempts to revive the economy. For example, they fight any bill that would increase electricity or gas prices  – even if such actions would create many 21^st century jobs by making clean energy competitive with coal and encouraging the use of hybrid vehicles. In a single stroke, raising the federal gasoline tax would narrow the deficit, encourage conservation, reduce oil imports, reduce carbon emissions, and make renewable energy more competitive. Alternative energy innovations will create millions of jobs in the next 10 years and, if Congress doesn’t do something soon, most of them will be in Germany and China. The key to the new-job treasure chest is for the U.S. to reduce imports of oil and cars, and instead drill our own oil and incentivize domestic production of hybrid cars and other exportable products. 

   Labor Relations.  At the 2011 Paris Air Show, Airbus booked $72 billion in A-380 orders (about 50,000 jobs), while Boeing got only $22 billion, in part because of uncertain deliveries for its new Dreamliner-787. South Carolina, one of 22 right-to-work states, offered Boeing $200 million in tax breaks to locate a plant in Charleston to assemble the Dreamliners. Boeing, one of the top U.S. exporters, accepted the offer and built a billion dollar, 3800-employee facility that’s scheduled to open this month. However, the National Labor Relations Board (NLRB), in response to a filing by the International Association of Machinists, complained that Boeing violated federal laws when senior executives connected the South Carolina move to the machinist union’s 2008 strikes. In its defense, Boeing said several factors lead to building the plant in South Carolina, including low labor costs and an international port. Boeing also said it added over 2000 jobs in its Seattle plant since 2009. If federal courts endorse the NLRB’s ruling, the new factory in South Carolina (a state with 10% unemployment) will shut down and Dreamliner assembly could move to China or another country that has favorable labor policies and costs. 

   Assistance for Companies That Export. Companies that export often grow rapidly and generate new jobs. Therefore, the government should encourage American companies to export and help them overcome the barriers of entering global markets. One form of support is consular services to guide companies through the red tape of foreign markets. Another support is providing trade financing, which has all but dried up from private sources since the recession. Approving trade agreements Panama, Columbia and South Korea also would make it easier to export by providing access to those markets. Obama talks about expanding exports – it’s time to do things that make it happen! 

   Conclusion.  A manufacturing renaissance coupled with increased exports would be a big step toward solving several daunting challenges in the U.S.: stubbornly high unemployment, providing opportunity for everyone in a class-stratified economy, deteriorating infrastructure, and a soaring national debt. The government policies necessary to stimulate manufacturing and exports require almost no budget expenditures.  In fact, the U.S. has abundant resources to meet these challenges:

• Plentiful natural resources like oil and gas – if we’d only use them;
• A relatively young population – if we could only put them to work;
• Best universities in the world – if citizens had access to them; and
• A history of business innovation – if we would unleash it.

Unfortunately, the American middle class will never again be several times more prosperous than the rest of the world. In addition, the U.S. won’t dominate manufacturing and technological discovery like it has in the past. That’s the nature of a global economy. It already may be too late to catch the Germans and Chinese in manufacturing and exports, but if Congress and the president would work together to address the challenges, at least the U.S. could stay in the game in third place.

Lurking Monster.  These days everyone in Washington is talking about the debt ceiling and budget cuts. But lurking in the future is a monstrous Social Security bailout that would dwarf the banking, auto and insurance bailouts. At $680 billion per year, Social Security is our largest social program. Its costs grow annually, and its long-term projections are deteriorating. Possibly as early as this year, Social Security could change from a program that finances other federal operations to a program that sucks cash from the Treasury. Left to operate as it does today, Social Security will drain a trillion dollars a year from the Treasury in 30 years. 

Trust Fund Funny Money. Until recently, I was confident that Social Security would provide benefits for the rest of my life. Today, I get worried when I hear the president and Congressmen say that Social Security fixes can be deferred because the trust fund will last until 2036. That’s an accounting sleight-of-hand because the trust fund doesn’t own real assets like property, gold or blue-chip stocks. Instead, it holds $2.5 trillion in Treasury bonds, and those holdings will grow to $4 trillion. For example, in 2020 Social Security will receive roughly $200 billion less in payroll taxes then it will pay out in benefits. But on paper the trust fund will still grow $15 billion because it will “earn” $215 billion in new bonds as interest. Enron executives went to jail for bookkeeping like that! When Social Security takes in less than it needs to pay benefits, it will raise cash by cashing in Treasury bonds. This Ponzi scheme collapses in 2037 when payroll taxes aren’t enough to pay benefits and the trust fund has no bonds left to redeem. The scheme only lasts that long if the Treasury Department can borrow $4 trillion from commercial and international markets to redeem Social Security’s Treasury bonds! 

The Crisis Worsens.  Social Security faces a worse crisis today than in 1983, the last time Congress enacted changes. As recently as 2008, the Social Security Trustee’s Report projected a cash surplus of $87 billion this year and $88 billion next year. But persistent unemployment has reduced tax receipts and dropped the projections to $19 billion and $18 billion, respectively. Three other factors intensify the crisis. First, people are living longer and retiring earlier, so they collect higher lifetime benefits. Second, the large baby boomer generation is retiring, but following generations are smaller which reduces the number of workers that support each retiree. And third, the stock market collapse and decline in home values increases the dependence on Social Security. Social Security will be a majority of the income for nearly half of the baby boomers who will retire in the next 30 years. 

Life Expectancy.  When Social Security began in 1935, the retirement age was set at 65 and life expectancy was 62. Today, men live to 76 and women to 82 on average. Furthermore, if current cancer and heart disease research is successful, life expectancies could easily reach 100 years. Obviously, linking retirement age to life expectancy is essential to preserve Social Security. Having older people stay economically active longer has four huge advantages: (1) Workers earn more and can save more for retirement, (2) The government receives more in taxes and pays less in benefits, (3) Serving older workers would be a new market, and (4) The economy grows faster because there are more workers. It’s true that workers who do manual labor might not be able to work past 65, but that is less of a problem today because age isn’t a big factor in the service and knowledge-based jobs that dominate our economy. 

Ticking Time Bombs.  The growing number of baby-boomer retirees and increasing life expectancy are ticking time bombs. Congress must defuse those two issues today to prevent Social Security from becoming an economy-threatening trillion dollar bailout in 2036. You might ask: What’s the worst that could happen? If Congress did nothing until 2030, taxpayers would be contributing nearly $300 billion annually in additional income taxes to redeem the trust fund bonds required to pay Social Security benefits. In that situation, Congress would face a choice between reducing benefits and increasing taxes. Always willing to defer hard choices, Congress would likely choose to fund Social Security annually from the general revenue pool. That would be the end of Social Security as we know it because retiree benefits would thereafter have to compete with other federal spending priorities. Life expectancies approaching 100 years will have an even more explosive effect. Most 100-year old Americans will have spent their savings and need bigger social Security benefits just to survive. 

Simple Solution.  If Congress considered Social Security objectively instead of treating it like a sacred cow, they could write the solution on a cocktail napkin: (1) Index retirement age to life expectancy as we’ve already discussed, (2) Make payroll taxes progressive, and (3) Gradually shift the trust fund from 100% Treasury bonds to a balanced portfolio. These three fixes would preserve the program in perpetuity. Today, employees and employers pay Social Security tax on incomes up to $106,000. That means people who earn $100,000 a year pay the tax on every dollar, while someone who earns $1 million pays tax on only 10% of his/her income. It’s doubtful that Congress would impose the Social Security tax on all income because that would be a large tax increase on middle class households. Rather a donut-hole approach would be effective: keep the ceiling near $100,000, exempt income from $100,000 to $200,000 (for example), and reinstate the tax on all income above $200,000. That change alone would pretty much wipe out the 2036 shortfall all by itself. In addition, Social Security trustees should gradually redeem the trust fund’s Treasury bonds and invest in assets like blue-chip securities, properties, and high-grade commercial and state bonds. That way, interest/principal payments from companies and borrowers would cover Social Security’s cash needs, rather than Treasury borrowing money to pay benefits. Taken together, these three simple solutions would insure I receive the Social Security benefits that have been promised. More importantly, my children and grandchildren could rest comfortably knowing they will receive benefits someday, even if they have to work longer to get them.

Conclusion. President Obama and Congress face the most important strategic choice since choosing to put health care reform ahead of everything else. Financially, the U.S. is tittering on the edge of a cliff that jeopardizes the economic well-being of our children and grandchildren. Today’s economic debate centers on three issues: cutting expenditures, restructuring the tax code, and reforming entitlements like Social Security. All three are urgent, essential and politically explosive; but Social Security reform may be the easiest. Such reform would produce a more progressive and sustainable system, ensure the government can pay for the benefits it promises, and show global creditors that the U.S. really is capable of governing itself. It’s obvious that Americans must work longer before they retire, and that high-income retirees like me will see our benefits reduced. I don’t like that possibility, but it’s better than pushing the country into bankruptcy. With the detonator ticking on Social Security spending as baby boomers retire and grow older, the terms of the debate are clear: (a) What should we expect from government? (b) How much are we willing to pay? and (c) What are we willing to do without? Let’s answer these questions for ourselves and communicate our wishes to Congress in order to make their hard choices easier, thereby avoiding another trillion dollar bailout.

History Lessons.  In 1973, President Nixon launched Project Independence to “summon the spirit of the Apollo space mission” and become oil self-sufficient by 1980.  In 1977, President Carter said our dependence on foreign oil was “the moral equivalent of war.” He proposed conservation standards and higher gas taxes, and set a goal to cut oil imports by one-third by 1985. The U.S. passed that goal in 1982 when Alaskan oil fields started producing. But when prices fell, conservation was forgotten and imports climbed. In 2006, President Bush again asked Americans to “end our oil addiction.” His plea also was ignored, and in 2008 oil hit $147 a barrel and gas passed $4 a gallon. However, even those prices were forgotten when the recession depressed gas prices.  Earlier this year oil again exceeded $100-a-barrel and President Obama started his “Win the Future” vision for a green, oil-independent economy. Will things be different this time? 

Imports Grow. According to the U.S. Energy Information Agency, the U.S. used 17 million barrels of oil a day in 1973: 11 million domestic and 6 million imported. By 2010, U.S. consumption only increased to 18 million barrels a day, but domestic production fell to 8 million barrels and daily imports grew to 10 million barrels. Two changes slowed the usage growth: (1) airlines reduced their jet-fuel consumption with efficient planes and better practices; and (2) energy-intensive manufacturing moved offshore. Today, 70% of the oil consumed in the U.S. is used in cars and trucks, so higher mileage standards helped too. Gas prices are likely to continue rising because the world is consuming more oil. In 1973 when Nixon was president, the world used 57 million barrels of oil a day. Today, it uses 86 million barrels a day and consumption is projected to be 97 million barrels a day in 2015. 

Instability in Middle East.  Importing oil isn’t just an economic concern, it’s a national security issue. First, it forces the U.S. to befriend countries that don’t share our values and, in some cases, support terrorism.  Second, the U.S. military spends billions every year to protect vulnerable shipping lanes and foreign oil facilities.  Would the U.S. be fighting in Iraq and Libya if they didn’t have oil? Revolutions in the Middle East have pushed oil prices to the highest level since 2008. New governments in Egypt and possibly Libya are likely to extract stiff terms from oil companies. Even relatively stable countries like Saudi Arabia need high oil prices to balance their budgets and finance the demands of their youthful populations. Bottom line: with turmoil spreading in the Middle East, oil prices are likely to hit new records before 2011 is over. 

Drill, Baby, Drill is a partial answer. Admittedly, new drilling permits won’t produce oil for years. Even after the site exploration is completed, deepwater wells in the Gulf of Mexico take months to drill and cost up to $200 million each. But if we’d started drilling in 1973 under President Nixon, 1977 under President Carter, or even 2006 under President Bush, the U.S. wouldn’t be importing oil today! Deepwater wells in the Gulf now produce 1.2 million barrels-a-day, the #2 source of oil after Alaska’s Prudhoe Bay. With oil prices over $100 a barrel, oil companies can afford to extract more oil from old fields with new techniques, drill more wells in the Gulf, and develop new fields like the Arctic National Wildlife Refuge.  Hopefully, this time around triple-digit oil prices will mitigate the stop everything environmental protection policies that put the U.S. in this unfortunate situation. 

The Oil Spill.  Last year’s oil spill in the Gulf reminds me of the reactor meltdown at Three Mile Island: no one was hurt and there was no lasting environmental damage, but the accident derailed our nuclear power industry for over 30 years. I don’t minimize events in the Gulf: the spill was an ecological and economic disaster. But let’s not react like we did to Three Mile Island. Instead, as drilling expands we must: (1) acknowledge the risks, (2) compel oil companies to implement safeguards like computer-controlled surveillance and double-walles ppes, and (3) monitor their performance. BP and other oil companies spent considerable time and money ($40 billion is a lot even for BP!) cleaning up the mess, and it’s in their self-intrests to prevent a repeat performance. 

Forced to Go Green.  Expanding domestic oil production is a stop-gap measure. Eventually, the U.S. must eliminate the use of oil for transportation and fossil fuels for electricity. There’s one favorable aspect of high gas prices: they force us to reduce consumption and seriously consider technologies like wind/solar power, nuclear power, electric cars, advanced batteries, and high-speed trains. Americans probably will buy more small cars when they face sustained $6-a-gallon gas prices like most Europeans do. It’s true that high oil prices don’t stimulate wind and solar energy because oil is rarely used to produce electricity in the U.S. However, if we substitute electricity for gas, all of a sudden alternative energy becomes very important to our pocketbooks! 

An Electric-Car Economy.  There is a silver bullet that could end our need for imported oil, bolster our stagnant economy, and reduce carbon emissions: electric cars and trucks. Today, almost all cars and trucks are fueled by oil, whereas electricity is produced with domestic fuels. With all electric cars, no oil producer could hold the U.S. hostage the way OPEC and third world countries can by threatening to disrupt the flow of oil. Further, an electric-car economy would release billions of dollars for consumers and businesses to spend on things besides gasoline. The technology for electric cars exists. The question is: Who will lead international production? Asian and European carmakers are moving ahead swiftly, while U.S. carmakers dabble with electric cars and wait for consumer demand to increase. The advantages of an electric-car economy are enormous: no oil imports, better  air quality, savings for consumers, and more government revenue. It’s even possible for the U.S. to become a net oil exporter and use the additional revenue to balance the federal budget and erase the national debt. 

    How to Get There. Building the infrastructure to support electric cars is easier than most people think. One reason why gas-powered cars are ubiquitous is there are over 100,000 gas stations in the U.S.  To be a viable replacement, electric cars need the same infrastructure. But we don’t need to start from scratch because distributing electricity is simpler and less dangerous than distributing gasoline. Electricity is available everywhere – gas stations already use electricity to run pumps, light lights, and advertise. A simple regulation requiring gas stations to install standardized electric car battery chargers would quickly make electric cars as convenient as gas-powered cars. That would allow drivers to go where they’ve always gone to refuel their cars and save most of the money they currently spend on gasoline. 

    National Energy Strategy. To build the electric-car economy, Congress must pass a bold national energy strategy with specific goals, policies, incentives, and taxes. You’re probably thinking: “Not much chance of that!” But it’s a natural part of the compromises required to reduce the national debt. For over 40 years Congress has spoken vehemently about the evils of foreign oil, but done nothing. It’s time to change that with a multi-faceted strategy that stimulates the economy, reduces deficit spending, and eliminates oil imports! Such an energy strategy would include:

(1) Regulations that expand safe domestic oil production,

(2) Annual increases in mileage standards for gas-powered cars,

(3) Annual increases in federal gasoline taxes,

(4) Incentives for consumers and businesses to buy electric cars,

(5) Regulations that build the infrastructure for electric cars, 

(6) Clean energy standards that put a cost on carbon emissions,

(7) Increases in federally-funded energy research,

(8) National goals for generating electricity from carbonless sources.

These policies would raise the price of fossil fuels; stimulate investments in solar, wind and nuclear energy; encourage consumers to buy electric cars; and slow global warming. Unfortunately, one or more special interest groups will vigorously oppose each of these provisions. 

    Conclusion.  I’m concerned that it costs $70 for a tank of gas, upset that we send hundreds of billions of dollars every year to countries that harbor terrorists, and angry that we spend trillions more to overthrow their governments like we did in Iraq and are doing in Libya. If Congress fails again to enact an energy strategy, the U.S. risks losing the clean energy race to Germany and China, thereby forfeiting a leadership position in future industries in a futile attempt to preserve 20^th century jobs. The same could have been said in 1973, 1977, 1986 or 2006. If we had started then, we wouldn’t have this problem today. I hope we change this time so my youngest grandson doesn’t have to pay $20 a gallon when he starts driving in 2020.

    Receipt For Taxes.  I’d like to know how the federal government plans to spend the money I just paid. The IRS should issue a 1-page Taxpayer Receipt to each family that paid taxes. Allocating my payment based on percentages of the federal budget, the receipt would show exactly how much I personally paid this year for defense, NASA, Homeland Security, education, Medicare, Social Security, interest on the debt, environmental protection, foreign aid, etc. The receipts would give us accurate numbers to consider as we debate national priorities. For example, many people think the deficit could be eliminated with budget cuts that leave Medicare and Social Security untouched. The receipt would show us how much of our taxes really go toward those two entitlement programs. 

    Biggest Ponzi Scheme in History.  By promising services and benefits today and hoping our kids and grandkids will pay for them, Congress is running a Ponzi scheme that makes Bernie Madoff’s $18 billion scam look like child’s play. The CBO says the U.S. faces a shortfall of $200 trillion in perpetuity – that’s the gap between revenue and expenditures under current policies. Last fall, two blue-ribbon panels in Washington proposed actions to reduce the deficit. Those recommendations gave Senators and Congressmen political cover to make hard choices and renege on promises they made to get elected. Unfortunately, the White House and both sides of the aisle have repudiated the recommendations. Avoiding decisions must be easier than standing up to special interest groups that will passionately defend their sacred cows and refuse to share the pain for the common good. Washington still isn’t ready to grow up and face spending that is too high and taxes that are too low. 

    Cuts Are Unpopular.  Everyone agrees to cut fraud, waste and abuse, but cuts become unpopular when they get specific. For example, farm subsidies don’t seem wasteful to farmers; and welfare isn’t a giveaway to recipients. The truth is everything in the federal budget is defended by some special interest group or it wouldn’t be there in the first place. If zeroing discretionary spending won’t to balance the budget; if reductions in defense spending are taboo; if trimming Social Security and Medicare are off-limits; if tax increases are forbidden; then the deficit can only go up. Apparently, the recipients of government programs (that’s you and me) aren’t ready to grow up either! 

    Tax Increase Boogeyman. Imagine that a year ago Congress raised the Federal gas tax (18.5 cents per gallon since 1993) to a dollar per gallon to fund highway projects. It’s easy to see special interest groups uniting against the increase by warning it would cost millions of jobs, jeopardize small businesses, reduce auto sales, and force the economy into recession. But the sky hasn’t fallen even though gas prices have increased 78 cents per gallon since March 2010. Sadly, there is one major difference: our highways are still falling apart because the hundred billion dollar increase in gas prices went to Libya, Iran, Russia, Venezuela and Saudi Arabia.  The point is: we don’t like tax increases, so we mindlessly resist an proposed increase without appreciating its necessity or benefits. 

    Most Complicated Taxes on Earth.  The National Taxpayers Union estimates U.S. businesses and households will spend $103 billion dollars and 7.5 billion hours to prepare 2011 tax returns that comply with the world’s most complex tax code. Our tax system also is inefficient because it’s a narrow base of income taxes warped by a mind-numbing array of deductions and credits. The Blue Ribbon panels suggested changing the code in a way that impacts everyone: eliminate cherished deductions like interest on home mortgages, implement a Value-Added Tax (VAT), increase taxes paid by the upper class, and lower corporate taxes. It remains to be seen whether President Obama will deliver on his pledge to restructure the tax code into a growth-friendly system that doesn’t distort people’s consumption choices and investment strategies. 

    Axing Deductions.  The U.S. tax code is a 20^th century relic. Huge shifts in global economics have been handled with band aid patches and a potpourri of deductions and credits that cost $1 trillion a year. The two most expensive deductions, home mortgage interest and employer-paid health care, are also the most inequitable since they preferentially benefit upper-class families. Further, the mortgage interest deduction fueled the explosion of sub-prime mortgages and equity lines-of-credit that caused the housing bubble.  Since flat tax rates on a broad base are less distortive than high marginal rates on a narrow base, the Blue Ribbon panels suggested eliminating the 300 current deductions and credits, and canceling the obnoxious Alternative Minimum Tax (AMT). Those actions would allow the top rate to be reduced from 35% to 23%, and still raise more revenue! Deductions and credits are immensely popular, so their elimination will be opposed by a coalition of special interest groups. An easy way out would be to put a ceiling on such deductions and gradually reduce the ceiling to zero over 3 to 5 years. 

    Implementing a VAT. Economists say consumption taxes (e.g., a VAT) are the best way to fund government because they are more growth-friendly than income taxes, especially corporate income taxes. U.S. income taxes are high by international standards, because we don’t have a VAT like most OECD countries. In the U.S., just 15% of government revenues come from consumption taxes, mostly state-level sales taxes. In other OECD countries, VAT produces nearly 50% of the revenue. If Congress were to rely on income tax increases alone to balance the budget, the average family would have to pay $11,000 more, an increase over 50%. While a VAT would raise the prices we pay for everything from cars to food, it would improve our global competitiveness since a VAT only applies to goods consumed in the U.S.  Therefore, a VAT wouldn’t apply to exports, but it would be added to imported goods consumed in the U.S. – thus making U.S. exports cheaper for the world to buy. A VAT should be part of any tax reform plan. 

    Taxing the Rich – A Populist Pipedream. During his 2008 campaign, President Obama won votes by promising to spread the wealth through higher taxes on families earning over $250,000 per year. While high-income families must and should bear more of the tax burden, it’s a pipedream to believe such increases could balance the budget.  According to the Tax Policy Center, even if the top tax rate was an outrageous 91%, the government still would have an annual deficit of nearly $500 billion. In 2008, the average tax rate for all households was 16.6%, the lowest since the IRS began reporting the data in 1992 – obviously, all of us must pay more taxes. The country doesn’t need higher taxes, rather we need policies that increase the amount that Americans earn by improving workforce skills, investing in new technologies, creating millions of new jobs, and promoting small businesses. 

    Lowering Corporate Tax Rates.  Washington rhetoric makes people think U.S. companies are tax cheats who off-shore operations and hide cash in tax havens, which the Treasury Department defines as any country with a lower tax rate than the U.S. – that definition currently includes every country except Japan. The reality is they are attacking good business practices that are entirely legal. The problem with sticking companies with high taxes is the ultimate stuckee isn’t the company, it is employees and customers. Economists estimate that when corporate taxes increase by a dollar, 75 cents comes out of employee pay and benefits and 25 cents is passed on to customers. How many more companies must move operations overseas to escape a 35% tax rate before Congress passes a tax rate that helps U.S. companies be competitive in global markets? 

    Ponder these ideas while you’re finishing your 2010 tax return. Balancing the federal budget isn’t just program cuts and tax increases; rather it’s about setting national priorities and policies to stimulate investment, promote growth, and create future prosperity. Is there hope? Absolutely! Our job as taxpayers and voters is to help Congress to do the right things. What do we want our government to do? How much are we entitled to? How much are we willing to pay? And what are we willing to do without? Until we answer these questions and communicate the answers to Congress, we can expect more of what we’re currently getting. In short, Washington can’t grow up until we do.