Six steps to start a real recovery

Originally published by The Hill here. From the border battle to increased Middle East anxiety and even fears of a pending Ebola pandemic, the world’s problems are once again distracting […]

Originally published by The Hill here.

From the border battle to increased Middle East anxiety and even fears of a pending Ebola pandemic, the world’s problems are once again distracting our nation, and its leaders, from the most important policy issue of our day:  how to improve economic growth.

Given its importance, legislators should understand and implement policies to mitigate stagnation, at a minimum, but should also spur what was once the greatest economic growth engine on Earth.  Here are six actions our nation’s leaders should take to ensure we start moving in the right direction:

1.      Enough with the regulations already.  We understand that legislators and regulators in D.C. like to think they know what is best for everyone.  But businesses disagree.  Since they are the ones who take the entrepreneurial risks, expand, invest, and create jobs, which creates economic output, perhaps we should give them a listen.  Regulations increase the cost to do business and increase the time to profitability, which thereby reduces returns on investments and scares away financial capital.

An ensuing debate at the FCC provides an interesting example. “Net neutrality” advocates believe that the only way to maintain the open internet as a powerful economic force is to hyper-regulate it through antiquated regulations.  Unfortunately, “Title II reclassification” will raise compliance costs, provide a disincentive for new market entrants and competition, and reduce overall investment.  When the idea was kicked around in 2010, the market caps of the leading internet service providers fell by $18 billion overnight.

2.      Reform the antiquated tax code.  No one seems to want to do so, but it has to be done.  The fear of a volatile and uncertain tax code is one of the business world’s biggest concerns.  There are so many flaws, it’s hard to know where to begin, so I’ll just mention a couple.

First, we have the highest corporate tax rate in the OECD, yet loopholes give us sub-average returns to the Treasury.  Corporations that lack the means to afford knowledgeable tax professionals, end up disproportionately paying for our national needs.  Second, we’re the only rich country that tries to tax income that is earned overseas.  Well, we don’t tax it until it comes back to the U.S. technically, but that’s why so many companies keep their money overseas instead of bringing it home to contribute to domestic growth.

3.      Obamacare and welfare just aren’t helping.  We have a productivity problem in this country.  Our output per working citizen isn’t rising like we’d like and our labor force is shrinking, yet legislators continue to enact policies that promote not working.  Providing healthcare without having to work sounds like a great plan for the poor, but has the unruly side effect of contributing to fewer working citizens.  Welfare policies could use a little tweaking for the same reasons.  For once, legislators should use their affinity towards everything European and follow the EU crowd on welfare reform, which has given rise to its increasing labor force. 

4.      Let’s invest in capital . . . human capital.  If we want our economy to produce more, we are going to have to invest more in the economic factor of production known as labor, or human, capital.  Providing the incentive to reenter the workforce won’t work if people lack the skills desired by 21st century employers.  If we shift dollars to retraining the unemployed, for example, they can be matched with the want ads.  Jobs will be created, businesses will have their required labor, and economic output will improve.

5.      Immigration that helps the economy.  Most Americans agree that immigration reform is necessary and most don’t approve of the “my way or the highway” approach that Congress is so fond of.  There are so many in-between policy options that we have to consider in order to increase the supply of employees needed to counter our 35-year low labor force participation rate.  For example, during a recent conversation with Congressman Labrador (R-ID), who happens to also be an immigration lawyer, I was amazed to learn of the millions of productive immigrants who become “illegal” due to technical glitches or outdated policies.  Common sense should be applied to passing laws that we all agree on, so that partisan bickering doesn’t continue to elongate the slow recovery.

6.      Keep money cheap.  Recent financial market headlines prove how scary even the talk of Fed action can be for investors.  If they finally decide to increase the rate at which they lend money to institutional banks, that higher rate trickles down to us when we want to buy homes, cars, get equity loans, invest in businesses, etc.  On the other hand, if the Fed decides to continue to maintain its historically low rate, we can cheaply borrow money and are more willing to purchase a house that was built by a construction firm that employs thousands of Americans.  Without long-term positive signals that we are in a significantly improved recovery, the Fed might want to reconsider any actions that have significant implications for an already fragile economy.

There are a number of options that legislators can and should consider in order to grow the country’s economy.  Unfortunately, intensely partisan politics has only ensured a legislative stalemate that puts the most important policy issue of our day on the backburner.  If we truly want to develop and implement a long-term economic growth plan, our elected leaders are going to have to take drastic, comprehensive action.  Otherwise it won’t just be our economy that suffers, but everyone, and every issue, affected by it.

Vélez-Hagan is executive director of The National Puerto Rican Chamber of Commerce, economic policy researcher at the University of Maryland-Baltimore County, and author of the upcoming book, Nousonomics: The Common Sense behind Basic Economics. @JVelezHagan