President Obama gave an impassioned 45 minute speech on rising income inequality and reclaiming the American Dream on December 4, 2013. President Obama Speech on Economic Mobility (12/04/13), (Video: President’s Speech). The President detailed how several earlier Administrations challenged social and economic discriminatory practices to protect workers and ensure equal rights to minority groups from the Industrial Revolution in the late 1800s to the 1960s Civil Rights movement, 1970-80s Women’s rights movement, and the 2000s gay rights movement. In doing so, he also hailed the merits of the Social Security program, unemployment insurance, and a minimum wage as part of FDR’s New Deal in the 1930s and Medicare and Medicaid programs in Lyndon Johnson’s Great Society in 1960s to ensure basic income protection in retirement and health care security for aged, disabled, and poor. President Obama hailed the power of social and political collectivism and government redistribution programs as the protector of the disenfranchised in a competitive world. Unfortunately, there are two weaknesses of collectivism proven over history: 1) self-interested government never walls-off the tax revenue or expropriated property to fund the designated program for future generations and rather spends the money on current needs, and 2) natural demographic changes (eg aging of a workforce) create material resource imbalances between pay-in and pay out population. As in nature, people and elected representatives consume all available public or private resources for current benefit until the money or resource simply runs out. And in the end, the benefit reductions are unacceptable to the beneficiary and the tax increases are too large to grow an economy. The result: government materially reduces or is forced to eliminate the benefit, and the beneficiary loses. The more insidious effect over time is the benefit makes the beneficiary more dependent on government and less motivated to learn new skills, work, save, and invest. Just look at the failure of communism, European socialism, and Islamic plutocracies, and the increasing bankruptcy announcements of cities and soon states if the Constitution allowed them to file for bankruptcy.
The good news is the solution is very simple: government policy needs to empower 315 million Americans to cooperate, work, save, and invest for their future. The combined power of a cooperating population will create a more perfect union. We must focus on the needs of the most disenfranchised population so we can reduce income inequality, reduce dependence and increase freedom, and solve our fiscal crisis. Before we discuss solutions, we must understand natural human behavior: people like any form of life are genetically programmed to compete and, cooperate when interests are aligned, to exploit available capital, natural, and community resources to improve their ‘inclusive fitness’. This is their ability to leave strong, productive offspring for the next generation. As you look around, inclusive fitness is at work in today’s marriage, living, education, and work patterns. As Dr. Martin Nowak’s team at Harvard’s Program for Evolutionary Dynamics has proven with mathematical modeling on human behavior, there are 5 rules for human cooperation. And they are very intuitive:
1. Kin selection: people will help those in closest blood relation.
2. Direct reciprocity: you scratch my back, I scratch your back.
3. Indirect reciprocity: you will help others in a community when reputational value is important.
4. Spatial selection: you will cooperate with people in closest physical living and work proximity.
5. Group selection: you will cooperate more with people who are members of several small interconnected groups than with people who are part of a small number of large disconnected groups.
With these 5 rules in mind, here are 8 actionable solutions today. I will not address the critical need of having stronger nuclear families; however, I would submit that better trained and more self-aware individuals with wealth creating jobs who can provide the social-emotional and financial support to a family should lead to stronger marriages and families.
1. Education: we need to end education discrimination immediately.
a. School choice and school vouchers. People in district have first priority on public school access. There are excellent parochial and private schools with excess capacity and great teachers ready to take kids from failing districts.
b. End tenure in public education and liberate hiring and firing. Teacher unions are free to sacrifice their own compensation to pay for terminated teacher pensions and benefits. Educators must be free to retain and reward excellence.
c. Public-private education trusts to fund pay for performance compensation programs around identified best educational practices. Employers and individuals can give cash or stock to regional trusts, which distribute school compensation tied to achievement of academic and extracurricular best practices defined as mix of a) excellence in education and b) relative improvement of the low performing student groups. We need to empower the private sector to help identify and reward school best practices.
d. Attract new teachers vs investment bankers and lawyers: for a pilot period, let’s waive federal income tax for the first $150,000 of household income if one person teachers in a federally-qualified K-12 school in the bottom 50% of performing schools, public, private, or parochial. That’s a $45,000 benefit and should motivate a lot of qualified Americans to apply for teaching jobs where our most needy children need them most.
2. Reward savings, investment, and wealth creation: President Reagan cut marginal income tax rates from 70% to 50% and cut capital gains rates from 28% to 20%. He tightened monetary policy to ultimately break the back of inflation, which created lower longer-term interest rates. In addition, he cut unnecessary regulations. The economy boomed with new risk investment from around the globe that America still enjoys 33 years later.
To start, we need to make sure every American, especially the young, find a way to earn and invest $10,000+/year pre-tax in 401(k) retirement programs that are invested in broad stock market indexes (eg Russell 3000 and S&P 500). Index funds historically generate 5-6% real rates of return (after inflation). A $10,000 starting balance plus $10,000 annual inflation-adjusted pre-tax investment at 5.3% real rate of return over 30 years should generate $1.9 million in present value terms, or $5.3 million in 30 year dollars. That provides personal independence from government. And we strengthen our individual and national freedom.
a. Employer 401(k) contributions up to $10,000/worker tied to performance. Applies for self-employed workers too. For individuals up to $100,000 of income and households up to $250,000, this could be a refundable tax credit (not just a pre-tax expense). The contribution could be a non-cash stock grant at $0.01/share (voting or non-voting) to company ESOP or cash contribution to 401(k). Either way, it’s cash neutral as a refundable tax credit. The money goes to the worker retirement account versus federal government. By eliminating employer tax deductibility for stock option compensation, employers will have much higher taxable income to fund this performance-based program for all employees.
b. Eliminate capital gains for stock sales to employee stock ownership programs or companies owned 20%+ by non-founder, officer employees. Allow all ESOP principal and interest to be tax deductible. Provide interest free ESOP tax credit if ESOP share of income grows annually to cover the tax credit cost to government.
c. Make all stock options qualifying options so workers only pay tax when they sell, not exercise. Authorize employers to loan up to 50% of stock value to facilitate employee option exercise and allow employers to loan capital at minimal interest rate to employee.
d. Eliminate estate and gift taxes so any individual or business can give any entity or individual money that has already been taxed for whatever intended purpose.
e. Ensure charitable donations are 100% tax-deductible. Let’s empower charitable donations to best support their target beneficiaries.
3. Social Security: Privately-owned, government administered program
a. Americans and employers pay 12.4% of the first $113,000 of income for Social Security = $14,000 on the first $113,000. Just like Sweden, Social Security can allow individuals to own their own retirement funds and invest in a government-approved list of funds. I would highly emphasize low load stock index funds that mirror broad indexes like Russell 3000 or S&P 500. The returns are noted above. Politicians say people older than 55 keep their current program and those younger can start the new program.
b. You own the funds and can pass on to your heirs tax-free.
4. Medicare/Medicaid reform: Privately-managed, government administered programs that guarantees cost savings and motivates smart consumption.
a. Require all 45 million Medicare beneficiaries to join privately-managed HMOs just like the pharmacy Part D benefit. Require Medicare HMOs to provide a better set of benefits and same choice of provider at a free market bid cost not to exceed 95% of last three year Medicare fee for service cost. HMOs can freely bid in an on-line Dutch auction once a year for the publicly-available Medicare business based on the publicly-available historical cost/beneficiary in the county. In order to maintain competition and aggressive pricing, the top three qualified bidders are offered to market in the market at the average price of the lowest two bidders. The lowest bidder is Medicare’s preferred HMO provider and beneficiaries do not have to pay the first year $1,200 specialty Part B premium. Currently, 25% of Medicare beneficiaries are in private Medicare Advantage. Let’s move to a 100% in a market-based pricing model at better benefit level than Medicare.
b. Require all 45 million Medicaid beneficiaries in the same model. Here, Medicaid beneficiaries will have a health savings account with a high personal deductible and a Medicaid pass-through of $1-2,000 so Medicaid beneficiaries have a real motivation to ask about pricing, think about consumption, and save money in their own accounts for future use. 70% of Medicaid population is already in HMOs, but not in a market bid model. Let’s move 100% to a market bid model.
5. Immigration: earned citizenship with the ‘Dream Card’.
a. Allow 7 million illegal workers to apply for a Dream Card with Office Immigration and Naturalization Services (INS). Provide employer certified letter of employment, last 12 month W-2/1099 stub, pay any Medicare/FICA and income tax, and provide proof of residence (lease agreement or property title). If worker is crime-free and maintains full-time work, worker can apply for citizenship including dependents in 3-5 years. In the meantime, the worker and dependents can enjoy access to public school system (first access to current citizens), Medicaid program, and other social services.
6. Housing: Privatize public housing projects.
a. Allow public housing units to become self-governed with HUD supervision at start. Buildings can evict undesired tenants.
b. Privatize building administration to interested companies
c. Provide crime-free residents with a full-time job an equity voucher (in lieu of multi-year living costs) so they can purchase an apartment or home. Government retains co-title to property for 2-3 years until resident proves they are able to responsibly pay the home mortgage. There are 2.0 million public housing residents and 4.7 million in Section 8 rent-subsidized homes. For those who are working, let’s get them out on their own so they can build a brighter future and build equity in their home.
d. Over-time, the government sell the housing projects for other development purposes.
7. Repeal ObamaCare and replace with market-based solutions.
a. 7-8% compound annual growth rate in health care premiums (now $13,000/family) has directly eroded middle income salary growth. Employers have paid insurance companies instead of workers. ObamaCare’s mandated minimum benefits, community rating, community coverage for pre-existing conditions, eligibility to age 26 on family policy, and individual and employer insurance mandate or fines are only going to INCREASE the cost of health care. Early estimates show that higher deductibles and premiums are roughly 20-30% across the board. That means family health care coverage under ObamaCare costs roughly $16,000, which is more than 100% of the annual US minimum wage ($7.25×2,000 hours = $14,500)! Clearly, new health insurance regulations make hiring and wealth creation more difficult especially for entry level workers and families!! We need to repeal ObamaCare immediately.
b. My health care solution is here: Health care solution. People with catastrophic conditions should be part of state health insurance risk pool. People with pre-existing conditions should be able to find coverage with some higher payment that is capped by law.
8. Rejuvenate incarcerated and welfare population with new job training.
We have 1.7 million people in US prison, 2 million in public housing, and 4.7 million in Section 8 housing. Let’s replicate the highly successful Twin Cities RISE program for this population. Let’s motivate employers and individuals to fund job/vocational training programs in our communities with charitable funds and then provide a state and/or federal bonus linked to successful job placement as well as year one and year two job retention. The State of Minnesota pays RISE $9,000 per new job for a former welfare recipient and another $9,000 after year one job retention. The program saves welfare costs, incarceration costs, and reduces recidivism rates. Twin Cities RISE: public-private pay for performance job training and placement. And let’s get them into the $10,000/year 401(k) investing program too so they can have a realistic shot at the American Dream.
In summary, the solution is simple: empower people to work, save, and invest long-term and provide a government administered framework to ensure we the people, achieve these desired outcomes. We continue Social Security, Medicare, and Medicaid programs, but make them personally-owned and controlled, and privately managed. In all cases, we focus on better outcomes with same or better benefit level at a lower cost to the government. In health care, we increase provider transparency, free market price/service competition among carriers, and consumer accountability and rewards for consumption decisions while limiting medical malpractice liability. And most importantly, the most disenfranchised in our society have a much more clear path to reclaim the American Dream.