I’m going on vacation tomorrow morning, so before I go I thought I might leave you with a few thoughts about how to fix all of America’s problems. Well not really all of them. Problems will still exist. But one of my core beliefs is that most people overestimate the number of important problems in America while underestimating the severity of the handful of really serious problems.
So lets fix these five things:
Step one—short-term unemployment: Big problem. The fix is to suspend the payroll tax that funds Social Security entirely, and replace the lost funding with money printed by the Federal Reserve. Promise that said printing will continue until nominal income catches up with its pre-crisis trend path, and that in the future the Federal Reserve will be targeting the level of nominal income and using this payroll tax swap as an instrument if needed to keep the target on track. I think there is a persuasive case that nominal income targeting alone would work, but pairing the target with the addition of this instrument should address the objections raised by fiscalists (since the instrument is fiscal policy) but also most of the objectives raised by demand denialists (since the instrument is also a pro-growth supply-side reform).
Step two—tax reform for real: Most tax reform proposals are lame small-beer nonsense that barely solves anything. Real tax reform starts with taxing land value (which should include the value of mineral resources), taxing pollution, taxing traffic congestion, and taxing public health hazards (alcohol, soon-to-be-legal marijuana, Fritos) in order to drastically reduce taxes on labor. There are meaningful positive externalities associated with people having jobs, so at the low end of the spectrum income taxes should be negative (mega-EITC, basically).
Step three—upzone everywhere: I’ve been tedious on this subject, but you know the gospel. Raise the real wages of people currently residing in high-cost metro areas by reducing housing costs. Raise the real wages of people currently not living in high-cost metro areas by expanding access to the higher nominal wages in expensive cities. Raise real wages even more by allowing everyone to take advantage of the agglomeration externalities and gains from trade (through larger market size and greater specialization) associated with greater density. Also note that if everyplace upzones, the actual impact on the vast majority of specific places will be modest. It’s a large quantity of marginal changes that will make a huge difference.
Step four—target higher population growth through immigration: Legalize otherwise law-abiding unauthorized migrants currently residing in the United States. For the future, aim to use immigration as a tool to increase America’s population growth rate back up to where we were in the postwar decades. Auction the visas. Use the revenue to pay for border security and to compensate local governments for local fiscal impacts. Create clear pathways through which foreign-born and foreign-trained people can qualify as medical professionals in the United States.
Step five—innovate with prizes, not monopolies: Right now we create financial incentives for authors and inventors by handing out monopolies as rewards. This makes some sense as an idea, but it also drastically raises the cost of innovation alongside the reward to innovation. There’s a point on the tradeoff curve where you want to be, and we’ve gone well beyond that good point. We need to scale back copyright terms, scale back the scope of what’s patentable, stop letting IP issues dominate trade talks, and recognize that the socially optimal level of infringement is higher than zero. Then build back in some of the financial incentives with large prizes for inventions in key areas, especially battery technology (a key complement to clean energy) and pharmaceutical cures that can treat illness outside the scope of Baumol’s disease.
Obviously even this five-point plan would still leave people with lots to fuss and argue about, including notably the education and health care systems and the question of what is owed to people who struggle economically even in a healthy labor market with a generally growing economy and a progressive tax code. But I think these are all problems that appear to loom so large primarily because we don’t have a healthy labor market and a generally growing economy and over the past generation have only rarely had a healthy labor market and a generally growing economy.