The "Fiscal cliff" is a byproduct of
stubborn, myopic, and undisciplined government institutions, both in the
executive and legislative branches, in the last 12 years or so.
Common sense, active agency, and
effective participation and responses are seriously expected from the
political players in the two chambers of the congress and the president.
Here are examples of what the government should
consider:
1. Raise the income tax rate gradually, let's
say at 1% every other year over the next 4-6 years, on people earning more than
a quarter a million dollars, to a maximum income tax rate of 37% to 38% at the
end of this process. A transparent and long-term tax plan should reduce
businesses' uncertainty/anxiety, and increase the level of transparency, which
in turn, increase spending and production and enhance sustainable economic
growth.
2. Eliminate tax exemptions gradually (over the
next 4-6 years) on income between $.25 million and 1 million. Eliminate all tax
exemptions on incomes higher than 1 million dollar. In addition, all tax
loopholes must be closed/eliminated.
3. Reform the entitlement programs. Americans
are living longer! Ongoing medical inventions and advancements, and higher
standards-of-living lengthen life expectancy; however,
at increasing costs. Medicare and Social Security benefits should be
reformed, to ensure their sustainability and the sustainability of the US
government budget, national debt, and the U.S. economy. One example of the
proposed reforms is the gradual increases in the retirement age that correspond
to the increase in life expectancy.
4. Reduce/reform the excessive regulations that
discourage firms (U.S. and foreign firms) from hiring or expanding in the USA.
This policy should expand the U.S. economy, and switch expenditures and
production from foreign goods and businesses to U.S. goods and businesses,
respectively. The energy sector is a good candidate for such a reform.
5. The Federal Reserve Bank should stop
injecting more money into the market through the ongoing $40 billion monthly
purchases of MBS (mortgage-backed securities). The effect of injecting more
money into the market is diminishing over time. There is already more than
enough money supply in the market. The increase in money supply in
the U.S. market is offset by a drop in the velocity of money in the U.S., such
that the effective money circulation in the economy is almost constant. The
Fed’s challenge is not to increase money supply, but to increase the
circulation (lending and borrowing) of money.
The above policy suggestions/ recommendations
should have little to no recessionary effects; a much better scenario than the
expected free-fall from the “fiscal cliff”. In the best scenario, the above
policy suggestions can lead to a long lasting economic expansion, higher
employment rate, and lower unemployment rates in the near future and long run.
In addition, they should reduce the budget deficit and reduce the rate of
increase of national debt (and even switch the deficit into a surplus and
therefore lower the national debt, in the near future). Furthermore, the
increase in net exports (through the expenditure switching effects of lowering
business regulations) should reduce the U.S. current account deficit.
These are examples of policy instruments/actions
that both Democrats and Republicans should debate, not only to avoid the fiscal
cliff, but also to sustain economic growth and to improve the quality of life
of the people in the U.S.
