In Part One of my article entitled "2009 America's New Deal with Capitalism," I concluded that the economic crisis that has enveloped us all had a scope in the range of $9 trillion, that this was a lot of money and that it was accompanied by an even more severe crisis, and that was a crisis of trust.
Trust in this context means implied trust among various groups in society such as the middle class, the financial services community and the governing class. Each of these groups has a stake in our present system of capitalism, and without credible efforts to restore this trust, nothing will work to save this system of capitalism from collapse.
In this second part of the series, I will first outline an alternate set of action steps that I believe are necessary to arrive at a solution. Then I will outline the benefits of such a new way of thinking.
Instead of focusing all its energies on preserving the top tier of the financial services architecture, what the Federal Government needs to do instead is focus on preserving the economic integrity of the American middle class!
Without the top tier of banking institutions the world will function anyway. Competition within the banking community is sufficient for the remaining, more mundane, bankers to pick up the slack in the event that the top ten banks disappear altogether.
By contrast, if you want to know how a world looks like without a middle class, go visit Mexico City or Sao Paulo, and if that does not get your attention, on your way back home make sure to stop over in Port au Prince (Haiti) and take a look at poverty in its ugliest form.
One aspect of the present crisis offers a glimmer of hope, and that is the historically low interest rate that the Federal Reserve is charging the most elite members of the financial community. The Bank of England went a step further, and set the rate to zero, a phenomenon not witnessed since 1650.
The Real Challenge:
With the steep deflation of real estate markets, millions of members of the middle class (especially the lower echelon), are at risk of losing the equity in their homes, the only real connection they have with – and commitment to – our present system of capitalism. This scenario is getting more real by the day.
AMERICA'S NEW DEAL WITH CAPITALISM
An action plan to prevent the real challenge from becoming a reality consists of two components. Component one is a household debt restructuring program consisting of interest-free "emergency" loans to members of the middle class. It capitalizes on the historically low interest rates charged by the Federal Reserve, but instead of offering it to the banks, it is offered as a one-time emergency opportunity directly to individuals and households. Component two is a tax burden restructuring program that allows the government to get its own financial affairs in order.
Component One: Household Debt Restructuring Program
Bypassing the Federal Reserve, the Federal Government offers every family or individual the option to enter into a one-time, interest-free loan of up to 50 percent of their reported household income for last year, or up to $50,000 per person and up to $100,000 per household. This loan is directly with the Internal Revenue Service (no middlemen, no fees, no closing costs, nothing). Prerequisites are that applicants have filed tax returns for the last three years and that they are current on their taxes. Conditions are that applicants agree to use the loan for restructuring of their debts only. They also agree to a tax bracket that is three points above what they pay now, for the duration of the loan, a maximum of ten years. The debt restructuring loans are to be used in the following manner (a simple, one page affidavit attached to the applicant's form 1040 will establish the specific goals of the applicant):
- Pay off or reduce the balance on any home equity loans or second mortgages outstanding;
- Pay off or reduce the balance on any education debt owned to financial institutions;
- Pay off or reduce the balance on any unsecured lines of credit with their bankers;
- Pay of or pay down any credit card debt or other forms of consumer debt with financial institutions or equivalent organizations.
As part of “America's New Deal with Capitalism,” the government mandates from the bankers that any of their customers who participate in this program of debt restructuring receive a one-time, two percent discount on any of the debts they pay off to their banks under this program.
Component Two: Comprehensive Tax Restructuring
The government is already way over its head in debt and there are several fairly painless measures to overcome this challenge of government deficits, as follows:
- A nationwide consumer tax on all purchases that are non-food and non-investment.
- A 5% tax on all services that are performed in the economy. The largest portion of our economy is in services and this sector is under-taxed or there is no tax on services transactions at all. The services sector includes architectural, consulting, legal, and numerous other services that are now under the tax radar. It also includes financial services such as buying and selling shares in publicly traded companies. A tax on this hyper-active trade is long overdue.
- A significant increase in the Federal tax on gasoline use.
It is my contention that this simple to understand program not only stands the test of fairness, it is also doable in a very short period of time, and it solves several problems at once, as follows:
- It reestablishes credibility to the idea that capitalism is for all citizens, not just for the well-connected and the upper crust.
- It gives everyone – young and old – breathing room to restructure the composition of their finances, especially since the tide of the markets has turned against them. People who have bought homes in the last three years can restructure. People who have lost fifty percent of their retirement savings can restructure their finances.
- Large cash deposits come into the banks through the front door, not the back door (the way it is done now with the TARPS program) This will unfreeze the credit markets from the ground up, not from the top down. The latter has been tried; it did not work, and no more tax dollars should be squandered in this manner.
- After an initial, huge increase in government debt, this debt will rapidly disappear from the additional tax revenue streams that will be created by both components. After all, participants are motivated to pay off their loans early so they can go back to the lower tax bracket. My sense is that with the proper balancing of rates, the government can return to a debt ratio of – say – where it was in 1998.
- The collective savings rate will increase from minus 2–3% in 2008 to a positive 3–5% within two years, and it may climb back to 10 percent in five years (where it should be).
- It provides specific tools to help transform the economy to a post-consumer society (a natural next phase in society with the baby-boomer generation entering retirement by the millions).
- It acknowledges that the problems we are in now were created and ignored by the upper echelons of our political and business elites and it would be unconscionable to reward that class for the errors of their ways while leaving the masses behind. After all, if the American middle class disappears into bankruptcy, so goes the upper class and so goes the world.
- It is inflation/deflation neutral.
- Its elective nature gives it a surgical precision because only those individuals and households that really need it will opt for it. The carrot for the others is to remain with the lower tax rate.
Most important, the program outlined above incorporates something that is missing from anything else that has been proposed to date. It will restore a sense of trust among the various groups in society, a prerequisite for stability, progress and the achievement of a shared sense of prosperity. As a result, large groups of people will come back into the market (financial and real estate), and the deflationary spiral will be broken before the entire system crashes into the ground. Breaking this downward spiral in the financial and real estate markets will be the ultimate cure that will help the American and world economies regain their footing.
In short, I believe that this is a win-win situation for all. It throws a lifeline to the millions of Americans who otherwise will be kicked out of the middle class. It also reestablishes the credibility of the Federal Government and its institutions, badly bruised by fifteen years of thoroughly discredited mantras about privatization and liberalization. It will maintain the core of our traditions of capitalism and democracy, while renewing an emphasis on responsibility, oversight and accountability; that sharing the wealth creates prosperity for all.
With the inauguration of a new President, this line of thinking may well be in harmony with a new spirit that is emerging in America, a new dawn, a new beginning for our global village. Goodbye Crassus, Caesar and Rome! Welcome Compassion, Hope and Goodwill among all!