Discover more from Economics Matters by Laurence Kotlikoff
From a Former POTUS Candidate -- Fifteen Bipartisan Reforms to Fix America
Five people were legally eligible to be elected President in 2016. I was one of them. I ran as a registered write-in candidate. This means your votes are counted. It took time, money, and help, but I ended up registered in enough states to win.
When I was a kid, there was a Republican politician named Harold Stassen. He ran for President nine times. Never won the primaries. Why’d he run? He had no particular reform agenda. He wasn’t a true-believing libertarian or communist. He was just a run-of-the-mill Republican out, it seemed, for attention.
When I ran, I worried about being viewed as a Stassen — a publicity hound. In truth, I had and have no interest in publicity. Its value is finite. How many people remember Stassen? I also was under no delusions. I knew my chance of winning was smaller than hell freezing over (particularly given global warming).
I also didn’t run to give my then 94 year old mother a heart attack. Being a hyper-confident Hillary fan with a strong ticker, I knew she’d just get heartburn. Same for my boys who felt the Bern. My wife’s question: Who exactly did I marry last year? But she stuck by me with many an arched eyebrow.
So, why did I run? (Actually, run again. I ran in 2012 on the Americans Elect third-party platform. But it closed down after a few months.)
I ran to provide economics’ remarkably simple answers to our myriad problems. I felt my profession had an obligation to provide its blueprints. Would they be used? That was for the politicians to decide. But those blueprints would be on the record.
Hence, prior to announcing, I spent a year consulting with other economists and writing a platform with, at most, 10 bullet-point-solutions.
My expectation? The press would tire of covering a petulant five-year-old and an empress in waiting. I was wrong.
When I declared, the Boston Globe sent a reporter and photographer to our apartment. I introduced our cat, Riley, who was snuggled next to me on the couch. An hour later after discussing my platform in detail, the reporter rose to go, pausing to ask about my campaign manager and war chest.
I announced yesterday. For now, Riley’s in charge. How much money will I raise? It depends on whether you and other members of the press write about my platform.
The next day, the Globe announced I was running and had hired my cat to run the campaign. No discussion of, let alone link to, the platform.
The upside? A great pic in The Globe of Riley. (I can no longer find the column online or I’d share the pic.)
I persevered, got registered, and ultimately got a decent number of reporters to discuss substance. A week after the election, I turned my platform into my book, "Your Hired — a Trump Playbook for Fixing America’s Economy.” You can download it for free at my website, kotlikoff.net.
Neither President Trump nor his advisers read the book. But I invite President Biden and Senator McConnell to do so. To encourage that outcome, let me list 20 bipartisan reforms — small and large — (not all in the book) that could make a very big difference to our country’s future. I’ll start with policies that can help us live with inflation, which may be here for quite a while. I suggest reading the list in bold and then circling back to the brief discussions of each per your interest.
One PS on my candidacy. After 2020, I really understood why I lost — I was far too young — only 69.
Twenty Bipartisan Ways to Fix the Country
Fully index the federal income tax to inflation. In particular, tax real, not nominal asset income. I.e., don’t tax the inflation component of Americans’ investment returns. It’s not real income.
At a minimum, tax only the real return on inflation-indexed Treasuries. This will give the elderly a way to invest that’s fully safe from inflation. Under current law, investing in TIPS (Treasury Inflation Protected Securities) is a terrible tax move if inflation continues to run high — since every penny of inflation protection is taxed.
Have the Treasury issue survival-contingent Annuity I-Bonds. Like conventional I-Bonds, Annuity I Bonds would pay an inflation-indexed real return set by the Treasury. The amount that could be purchased annually would be set at, say, $25K per person. The return would be higher than on standard I-Bonds because you’d only get paid if you are alive. The Treasury would set different returns for different birth cohorts since they have different projected longevities. The rates would also depend on the age of purchase. Buying a Cohort I Bond would effectively constitute buying an inflation-indexed annuity — something the elderly desperately need to do, but can’t now do. (Unlike standard I Bonds, they’d pay an annual real coupon through the end of one’s life.) No private insurance company offers inflation-indexed annuities.
Absent doing number 1, index the thresholds beyond which first 50 percent and then 85 percent of Social Security benefits become taxable. This will protect current and future retirees’ Social Security benefits from being cut surreptitiously and randomly. This stealth time bomb is the 1982 handiwork of David Stockman, President Reagan’s former head of the Office of Management and Budget. Stockman was and is properly hyper-concerned about our country’s long-term fiscal insolvency. This needs to be addressed, but transparently — not by annually cutting retiree’s after-tax benefits based on a macro variable, inflation, that no one, including the Federal Reserve, can fully control.
Eliminate Social Security’s phony Earnings Test. Over one-in-three 54-65 year-olds don’t participate in the labor market. For those between 62 and 67 — the ages when you can collect early retirement benefits, the fraction participating is roughly 40 percent. Many of these people lost their job due to COVID and joined the “Great Retirement.” When this happened, they immediately started taking Social Security. Having done so, they realized that if they went back to work and earned more than $19,660 (the 2022 exempt amount), they’d lose 50 cents in benefits for every dollar earned above that exempt amount. (The tax is 33 percent above $51,960 in the calendar year you attain full retirement age.) What most such early retirees don’t realize is that Social Security will reimburse you for the loss of benefits due to the earnings test. The reimbursement comes in the form of a permanently higher benefit level starting at full retirement age. In other words, the government pretends to tax us, but doesn’t? As Robert Pozen and I argued in the New York Times, the earnings test is a terrible joke. It’s likely leading millions of uninformed early retirees to permanently call it quits when they’d otherwise return to work.
Eliminate Social Security’s 12.4 percent (employer plus employee) FICA tax on those over full retirement age. This will likely more than pay for itself in the form of higher federal income taxes.
Provide, at long last, free high-speed internet to every child in the country. Roughly one-quarter of our kids don’t have internet at home, let alone fast interest.
Provide free laptops to every child living in a low-income Census district.
Have the Department of Education hire our nation’s premier teachers to produce freely available, on-line K-12 courses in all subjects and provide the laptops, pods, and headphones needed to make on-line, in-class learning successful. There should be multiple versions of each course, so students can have access to different ways to learn, say, geometry. It’s a free resource that both teachers and parents homeschooling their kids can use. And the timing is perfect. Almost all schools in the country now have high-speed broadband access. I’m not arguing for putting a headphone on children and leaving them in front of a screen inside a pod all day. How best to use this technology would be up to the teacher. But this School of One (Teach to One) model has been tested in the Bronx, Brooklyn, and Manhattan with great success. When online teaching is underway, the kids aren’t being disrupted by other classmates and the teacher can move from pod to pod and provide individual guidance. This explains the name. Finally, if some teachers or their unions feel threatened by the DOE posting free on-line courses, fine, they don’t need to use the tech. Parents can view the courses with their children at night or on weekends. This is our best path to end educational inequality and its predictable outcome — economic inequality.
Organize a small army of certified volunteers to read and speak for an hour or more every day to infants age 0 to 3. This appears to be the single most important policy the government can undertake. Please read this article sent to me by George Halverson, former CEO of Kaiser Permanente, or this article by economics Nobel Laureate, James Heckman. America ranks miserably compared with other countries when it comes to early childhood education. Consequently, we have huge fractions of children who can neither read nor write. Before COVID, I worked on a UNICEF mission in El Salvador. There I learned that the government assigns nurses and other professionals to visit the homes of all newborns and check, not just on the child’s physical condition and nutrition, but on two key things: Is the infant being read to and spoken multiple hours a day.
Adopt Medicare For All, but do it via the Better Care Plan, discussed in this column with George Halversen and a Who’s Who of top health economists and professionals. As I’ve been writing for decades, our country is on a path to fiscal insolvency — a path that’s worsened year after year. If you include our colossal off-the-books debt together with our official debt, it’s roughly eight years of GDP! Stated differently, we need over 6 percent of GDP more per year in taxes to cover CBO-projected spending. The Better Care Plan can, over time, cut our nation’s healthcare bill from 18 percent to 12 percent of GDP — roughly the share being spent by France, Switzerland, Germany, and other leading countries — all of which have a version of the Better Care Plan and all of which have far better health outcomes. This means scraping Medicare, Medicaid, and Obamacare and requiring that employer-based health plans be open to enrollment by non-employees.
Eliminate the federal income tax, the corporate income tax, and the FICA tax and replace them with a payroll tax that covers all earnings above $40K, a federal retail sales tax, a value-added tax, and a progressive, cash-flow consumption tax. This will provide a far more equitable and efficient tax system. Many, perhaps most, of the super-rich live like kings while paying essentially nothing in taxes. They simply borrow against their wealth to pay for their lavish lifestyles and leave their appreciated assets to their children free of capital gains tax due to a perfectly legal tax scam called Step Up in Basis. Apart from the payroll tax, the other three taxes are consumption taxes — favored by virtually most public finance experts. Consumption taxes reduce the burden on workers in replacing taxes on earnings with taxes on spending. And they indirectly tax wealth since wealth is eventually spent, including by heirs. This reform would shift our tax system from mostly taxing wages to taxing wages, at a lower average rate, and taxing wealth as it’s spent.
Social Social’s latest Trustees Report indicates an unfunded liability of $62 trillion! The old system needs to be replaced by a modern version that’s fully funded. My plan would pay current retirees and workers their accrued benefits but eliminate further benefit accrual. This is easily done by filling in zeros in everyone’s earnings records going forward. The replacement system —The Personal Security System — would entail everyone contributing 10 percent of pay to their Personal Security Account (with combined spousal contributions split in half and allocated to each spouse’s account). The government would make matching contributions on behalf of the poor, the disabled, and the unemployed. All contributions would be invested identically in a market-weighted index fund of global securities. This could be handled by a single laptop. Wall Street would earn nothing, nada, zero, rien, gar nichts! The government would guarantee a zero real cumulative return as of age 57 on one’s account, which would be sold off through age 67 and invested in inflation-indexed Treasuries. These Treasuries would be used to pay everyone in the same birth cohort an inflation-indexed annuity. The annuities would start at age 62 (based on withdrawals through that date), with participants receiving all their annuities by 67. This system would be transparent rather than the user nightmare we now have. Yes, we’d all be forced to save more. But as a nation, we save next to nothing — just 3 percent of national income. It would also provide the young with a system they can rely on.
Gradually adopt Limited Purpose Banking, which would require all financial corporates to operate as 100 percent equity-financed mutual funds. In 2008, 19 major U.S. financial institutions collapsed in one manner or another. This was due to a financial run the likes of which hadn’t been seen since the Great Depression. In this case, banks, rather than households, ran on the banks. The cause? Pure panic, not the list of alleged culprits, none of which can be remotely implicated based on the facts. The fact that the economy can scare itself into a “Great Recession,” with each new bank collapse stoking economic terror, tells us two big things. First, our economy is subject to multiple equilibria and second, the financial sector needs to be resilient to panic. As discussed in my book, Jimmy Stewart is Dead, that’s easily done by gradually transforming banks and all other financial intermediaries into equity-financed mutual funds. With the exception of leveraged (backed-to-the-buck) money-market funds, none of the country’s 10,000 mutual funds failed. Rather than respond to the financial hurricane by rebuilding the financial system out of brick, we rebuilt it out of straw. Hence, it’s set to collapse yet again with no real warning.
Stop locking the poor into poverty. One in four Americans in the bottom fifth of the resource distribution (the poorest 20 percent) are in a 70 percent or higher marginal tax bracket. Some of this is due to the tax system. But most is due to the clawback of benefits associated with earning more money. The tax and benefit-policy reforms I propose would place everyone in a 30 percent marginal tax bracket, but remain highly progressive.