I did not write this article to depress you, I have several suggested solutions to reduce the middle class
misery rampant in America. But, first, do your country a favor and get a full understanding of America's
The American economy is in a downward spiral and if the American voters are to bring an end to the
economic misery, they need to understand the factors that caused it. If voters ignore the underlying
problems, escalating deficits will make them worse.
Why? America has taken out a mortgage on its future tax income. For years that tax income has been too
small to pay the interest or any of the principal of the loan. In fact, each year America has borrowed
more and raised the amount of the principal. In 2010, the interest on the National Debt was over $400
billion. In both 2009 and 2010, the federal government spent well over $1 trillion more than it received in
revenue. The national debt is now over $14 trillion.
In April 2011, Standard & Poor's (S&P) issued a "negative" outlook on the US highest quality debt rating,
historically "AAA." Progress balancing the budget is essential. The international money men who hold
the mortgage will begin to feel insecure about their investment if the US debt rating is reduced and may
soon demand higher interest rates.
America is rapidly approaching the kind of crisis that put Greece into receivership, with its trading
partners dictating its future. Obviously, it would be best if Americans resolved their economic problems
themselves. So, every American needs to learn what is happening to our economy.
The first seeds of our current Great Recession were planted in the 1930s with Social Security, which is
basically an unfunded pension plan. Congress has circumvented the legal requirement that pension
plans be funded in America by claiming that Social Security is insurance, but, under any name, the
primary business of Social Security is paying pensions for old age or disability. It is a pension plan.
When Social Security began, there were millions of workers and few retirees. Now there are over 50
million retirees. In 2010, spending for Social Security and a few other pension obligations was about 15%
of the total Federal spending.
More seeds of our current Great Recession were planted in the 1960s. Lyndon Johnson's Great Society
program added Medicare / Medicaid and increased welfare programs. Combined, Medicare / Medicare
and Welfare were about 31% of the Federal spending in 2010. (Defense was another 15%, education
another 15% and miscellaneous another 24%.)
Helping the poor and the old and the infirm in our society is undoubtedly a good thing, but to sustain
our current level of Social Security, Medicare / Medicaid and Welfare without more borrowing, we need
a big tax base. The current economic problems of America are caused by a shrinking tax base.
The weed seeds that have choked the American garden were planted in the 1990s by Bill Clinton. First,
there is NAFTA which linked America with Canada and Mexico in a free trade zone. Then America joined
a worldwide free trade zone as part of the World Trade Organization. The treaties that brought America
into these organizations have had dire consequences for the American tax base.
The minimum wage in Mexico is about $5 per day. The minimum wage in China differs from province to
province. It is about $5 a day in areas where there are plenty of workers, but goes as high as $10 per
day in areas where there is a shortage of workers. The minimum wage for an 8 hour day in America is
This wage disparity has caused over 40,000 American factories to close in the last decade. In the last
decade America has lost over 5.5 million factory jobs. Factory jobs are usually well paid in America.
While many of these 5.5 million employees have found new work, most are making substantially less pay
in the service sector, which tends to be poorly paid in America. The American tax base has shrunk
because of the lost factories, which resulted in both higher unemployment and reduced wages.
The tax base has also shrunk because of the collapse of the housing market. The Great Recession
began in 2007 because of greed. Bankers began bundling mortgages for sale as securities. These
securities promised a high yield and proved to be very popular internationally. When solid mortgage
borrowers became scarce, lenders falsified documents to give mortgage loans to unqualified buyers
(mortgage fraud). These unqualified buyers began to default on their mortgages.
By 2007, the results of the lost factory jobs and bad mortgage loans became apparent. A high number of
mortgage defaults, involving both low risk borrowers who had lost their jobs and high risk borrowers
(who should never have had mortgages), bankrupted both security companies and banks. The bailouts
began. The American economy collapsed and the Great Recession took over.
The housing market is critical to the American economy. Because most houses are built on site, housing
provides local people with good jobs. These days, there is a huge supply of existing unsold houses,
millions of them foreclosures. As a result, new housing starts went from a monthly high in January, 2006
of 2,273,000 to a low of 479,000 in February, 2011. (Forecastchart.com/chart-housing-starts.html) That
drop in housing starts translates to the loss of millions of well paid jobs in the construction industry.
Not only does this loss of jobs cause the tax base to shrink, it also results in lost income to various
businesses that support the housing industry, lumberyards, plumbing and electrical supply, etc. And
people with reduced income or out of work buy less. There are failed stores and restaurants all over the
country. And that translates to even more people out of work.
About 80% of the federal government's revenue comes from individual income taxes and payroll taxes.
So Americans out of work are a double whammy to the American government. First, the government
loses their tax income, second the government has to pay unemployment benefits and / or welfare
benefits to them and their families. The combination of high unemployment and high social benefits is
lethal to the American way of life.
As I said, I did not write this article to depress you, There is something every American can do in this
crisis. Here are some ideas.
If you are poor, stop buying junk. Almost all of the small cheap stuff in the dollar stores is from China.
Dollars you spend there on non-essentials go to Chinese factories, shipping companies, and exporters
and importers. (Bulky items like toilet paper and laundry detergent are probably American made, this is a
good place to get them cheap.)
As a poor person, you can benefit your country by buying quality products second hand. This is because
all the money stays in America and, if you buy at a church or charity store, your money benefits other
If you are prosperous, there are two things you can do. First, be charitable. Clean out your closets and
your garage and call the Salvation Army or Goodwill for a pickup or take it to your church's thrift store.
Second, spend money. Buy American products, take American vacations, remodel your house, eat out,
Here is a suggestion for the state legislatures. Both Florida and California have lotteries, these are two
of the states hardest hit by foreclosures. Bundle the foreclosures into a lottery, say 1000 houses at a
time, so there would be 1000 chances to win a house in Florida or California for each ticket sold. Sell
tickets until there is enough income to reimburse the bank for the outstanding principal plus a flat rate
for foreclosure costs, cash for any needed repairs to the houses and a fee to the lottery commission for
advertising and expenses. If the first dream home lottery proves successful, schedule regular drawings
until all the foreclosure houses are gone.
Over 80% of states have lotteries. Not all states have the same glamour as Florida and California, but
most American foreclosures are in the Sunbelt, where people desire to live, so this could substantially
reduce the unsold inventory of homes. When the foreclosed homes are gone, the home construction
industry will recover.
The rest of my suggestions are for the federal government. A combination of cost cutting and increased
revenue is required to balance the budget.
Let's start with the social programs. Continue to skip the Social Security cost of living adjustments.
Medicare / Medicaid has been beset by fraud. The government has set up a task force to try to deal with
the problem. That's a good start, but I suggest that the task force put together a 45 minute presentation
explaining the usual ways Medicare fraud is done, how to spot Medicare fraud, how to report it, and
examples of how lucrative Medicare whistle-blowing can be. Make sure that the lecture is heard by
every graduating class in any of the health care fields, nurses, nurses aids, medical technicians,
medical billing clerks, etc.
Since 2006 Medicare has had a drug benefit, Part D. The law prohibits the government from negotiating
drug prices and provides for double administration, as it must be overseen by both insurance
companies and the government. The current Medicare drug plan is cumbersome, confusing and acts as
a subsidy to both insurance companies and drug companies. Scrap it and control drug prices for
seniors instead. Regulate by law the maximum cost of any drug to a person on Medicare or Medicaid.
Fix the Medicare / Medicaid recipient's drug cost at two times the actual cost of manufacture of the
generic equivalent drug, if a generic equivalent is available. Fix the Medicare / Medicaid recipient's
drug cost at four times the actual cost of manufacture of brand-name drugs. The markup on drugs
ranges from outrageous (generics) to astronomical (brand names). Stop paying it. Stop paying for
insurance company administration. Stop providing opportunities for fraud. Save seniors billions of
dollars in drug costs and premiums. Save the government millions each year.
It would be good for America and the American people to have a universal coverage plan like Canada's
health coverage. The plan schedules the maximum covered for various services. The government pays
90% of that maximum. Generally, Canadian clinics accept the 90% as full payment. Each clinic has several
doctors, patients can choose their doctor and health care is free. Everyone is covered. Rich people can
go to doctors who charge more than the maximum covered, and then pay the difference themselves. As
with Medicare, payroll deductions pay for the plan.
Why doesn't America have a health plan that simple and universal? The unholy marriage of special
interests and politicians prevents it. Special interests contribute campaign funds. Politicians please
their contributors. America winds up with government health care which feeds the insurance
companies, the health care organizations and the drug companies.
(The best argument I can make for term limits for Congress is the state of American health care. We
need some Senators and Representatives who are retiring and have nothing to lose. In the name of
fiscal sanity, someone must kick the big pigs away from the public trough.)
Last year's health care reform is supposed to cover everyone and save money. In my entire life, I have
never seen a government program that did not fail to save money and cost twice what was projected.
Given the current state of the economy, Congress should postpone implementation and funding of last
year's health reform act for at least two years. Eventual implementation should be tied to a balanced
I will not recommend defense cuts, but I think there should be some. America spends 6 times more that
any other country on its military. It has been estimated that it costs $1 million each year to support a
soldier in a war zone. If it were up to me our soldiers would be back home within the month.
Now would be a good time to review every government program and cut those which produce little
result. An example would be government support of ethanol, which produces only about 25% more fuel
than the amount used in growing the corn and processing it. Scrap all marginal programs. Where
possible help those dependent on them. (Because some factories were built in response to the federal
program, consider converting ethanol factories to "White Lightening" stills and allowing current owners
to sell their products abroad exempt from federal liquor tax for 5 years.)
The obvious answer to the huge past and projected deficits (the estimated deficit for 2011 is over 1
trillion, $1,645,100,000) is increased revenue. The shrinking tax base caused by the loss of income of
the working class must be compensated for if the country is to survive. Taxing the paychecks of the
poor and the struggling middle class is both heartless and useless. You can't get blood from a stone.
The only alternative is taxing those people and businesses that have money.
The most obvious target is the capital gains tax reduction. Initially, investors were allowed to pay taxes
on investment income at a substantially lower rate that their normal tax rate. The idea was to stimulate
investment in American business, however American business is moving out of the country as fast as it
can. The tax reduction has not served its purpose and it lingers on solely as a tax loophole for the rich.
Corporations have been avoiding billions of dollars in American corporate taxes by channeling their
profits into countries that have no corporate taxes. (See Google tax loophole for an example.) It is
estimated that these tax avoidance strategies cost America $60 billion in lost tax revenue each year.
Close the loophole and generate tax revenue from every business that operates in America.
I suggest that all businesses that do business in America be taxed on the percent of their profits that is
equal to the percent of their customers that are in America. For example, if 20% of Google's individual
users were in America in 2010, then 20% of Google's profits would be taxed at the American corporate
tax rate of 35%, which means that Google would remit 7% of its profits to America. Essentially, this would
be a tax on the profits of every corporation for the privilege of exploiting the American market, and it
should generate substantial new revenue.
By any measure the loss of manufacturing jobs occasioned by the free trade treaties of the 1990s has
been a disaster. Trade deficits have accompanied the loss of factories. In 2010, our trade deficit with
China was $273 billion. Our trade deficit with Japan was $60 billion. Our trade deficit with our NAFTA
trading partners, Mexico and Canada, was $95 billion.
As a result of trade deficits, about $1.1 trillion of US treasury securities are held by China, about $900
billion by Japan, about $125 billion by Mexico and Canada combined. Total US treasury securities in
foreign hands is now about $4.5 trillion, up about $600 billion in the last 12 months.
At this time I have no complaint with NAFTA (although the low minimum wage in Mexico is problematical),
this local free trade agreement has many benefits for America. I am not concerned with the trade deficit
with Japan, because the minimum wage in Japan is similar to the minimum wage in America. Japan is
creating workers who can afford to be consumers.
I am very concerned about the trade deficit with China. China is not developing internal markets, most
of its workers are too underpaid to be consumers. Instead, China is using currency manipulation and
other questionable trade practices to exploit the markets of its trading partners and denying American
manufacturers access to its markets. China has been a permanent member of the World Trade
Organization since 2000. This situation has allowed it to take advantage of its trading partners.
Rather than continuing to attempt to get fair treatment from China, I would suggest that the United
States unilaterally withdraw from the World Trade Organization. This would not affect our relationship
with our NAFTA partners, Canada and Mexico. Our arrangement with them is controlled by a separate
treaty. It would allow America freedom to deal with its trade partners as they deserve.
For example, if a trade partner has generally dealt with us fairly, we could simply continue to deal with
them as in the past, conforming to the standards of the World Trade Organization. Trade grievances that
arise could be dealt with immediately through direct country to country talks.
China is a special case. I suggest that America add a 25% federal sales tax on all goods made in China
until such time as the minimum wage in China is at least half the minimum wage in America. (Use the UPC
bar code to identify country of origin. Be prepared to seize Chinese goods with no UPC codes or false
UPC codes.) This federal sales tax should raise over $150 billion a year.
This sales tax could be collected by existing agencies in states that have sales tax (for a small
processing fee). Collection agencies would be required in those five states that don't have sales tax.
Warn our other trade partners that within a few years we will be looking at their minimum wages also.
I mentioned the outstanding $1.1 trillion in treasury securities in China for a reason. What I am
proposing is a long term trade war with China. The trade war would not end until China adjusted both its
minimum wage and its trading practices. We have a great advantage in this trade war. In 2010, we sent
almost $92 billion worth of goods to China. In that same year, China sent almost $365 billion worth of
goods to us. In a direct trade war, China can only inflict only 1/4 of the pain on us that we inflict on them.
An obvious tactic for China is to refuse to continue investing in treasury securities. At the beginning of
this Great Recession, the American tax payers bailed out the bankers. When the American people come
knocking on the banker's doors looking for investment in treasury securities to maintain the low
interest rate, the bankers better be home.
In the last three decades, the income of the top 1% of Americans, the super rich, more than tripled. In
the same time period, the bottom 80% of wage earners in this country have seen no improvement in
their wages. The only way the budget can ever be balanced is with increased taxes on the rich. They
elected our politicians, they paid for tax loop holes with campaign contributions. Now it's time for them
to stop manipulating the system and pay up.
I have suggested no strategies to return industry to America, but that has to happen also to insure the
long term prosperity of the country.
Amo Paul Bishop Roden