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January 21, 2011

Mercatus Scholars Discuss State of the Union Topics

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With Americans worried about the country’s economic outlook, this week’s State of the Union will address: jobs, spending, tax reform, economic competitiveness, education and more. Mercatus scholars break-down these issues and discuss the ideal proposals they would like to hear from the President. Check back here as commentary is updated as more information is released.

JOBS

Antony Davies:

"Tomorrow, the President will surely focus on jobs, but the government cannot create jobs, it can only shift them," said Antony Davies. "And, it can’t even shift jobs smartly, because the government doesn’t understand what jobs are more valuable to the economy than other jobs."

"Where jobs are concerned, the best government can do is to desist from destroying jobs by removing impediments to job creation such as business taxes, unnecessary regulations, licensing requirements, and wage controls," said Davies.

"The President will call for investment in future productivity, but the government can’t distinguish between prudent and imprudent risk," said Davies. "The best it can do is to avoid destroying private investment by removing impediments to investment such as capital gains taxes, interest income taxes, and the estate tax."

Bruce Yandle:

“Politicians and others speak of taking action to create jobs, almost as if the economy will respond like a lawn that receives fertilizer and rain," said Yandle.  "But as data from the Bureau of Labor and Statistics indicates, the economy is not static at all.”

“Governments can take actions that improve the economic climate for private sector firms so that more people will seek work and firms will hire more workers," said Yandle.  "These steps include reducing taxes that individuals and employers pay when filling a job and eliminating burdensome regulations that affect the use of labor."

TAX REFORM

 Matt Mitchell:

"Ideal tax reform would include lowering the rates and broadening the base by getting rid of tax exemptions, credits, and other loopholes that cause inefficiencies in the economy," said Matthew Mitchell. "Things like the home mortgage interest deduction bias people toward home borrowship instead of home ownership, which one could argue contributed to the housing crisis. Since the interest on what is borrowed to pay for a home is tax deductible, it incentivizes people to put down as little as possible."

"We also need permanency and stability in the tax code, and not a code where a large percentage of it has an expiration date," said Mitchell. "The tax deal passed in December merely kicked the can down the road, because we will have to have this conversation all over again in two years."

"The other meaningful step toward tax reform is spending reform," said Mitchell. "All spending must be paid for with taxes, and even when we borrow, it's simply delaying taxation."

"The President is likely to call for what he will characterize as 'intelligent' and 'targeted spending,'” said Mitchell. "In many ways, this is part of the problem. Government spending tends not to benefit the general welfare, but instead it enriches the targeted and specific welfare of politically-favored groups."

Antony Davies:

"Reducing the number of tax brackets is a step in the right direction, because it moves us towards a  flatter tax system, which encourages entrepreneurship and enfranchises all of your voters," said Davies. "Currently, we have a system where 50 percent of voters don’t pay taxes."

"Lack of permanency is a problem – if people anticipate that their taxes will rise in the future, they are hesitant to spend," he said.  "They need to announce the tax cuts are permanent – that’s when you’ll see the economy pick up because people can plan."

SPENDING REFORM

David Primo:

"Ideally, the President would make a bipartisan plea for legislators to commit to serious budget reform by the end of 2011, with serious being defined as ratcheting down the level of government spending on a permanent basis, reforming entitlements, and putting in to place binding budget rules that will prevent future Congresses and Presidents from running up spending to unsustainable levels," said David Primo.

"More realistically, it would be impressive if he committed to putting together a bipartisan working group of members of Congress and the presidential staff to work toward a serious reform of Medicare and Social Security," said Primo. "Even though it wouldn’t be binding, having Congress and the President’s staff sit down and try to reach an agreement would send a really strong message about his commitment to reform."

"It would be nice to hear the President move beyond the rhetoric," he said, "since at this point, neither party has done so."

David Henderson:

"To rein in spending, Congress and the President need to abandon the usual Washington view of cuts, which involves simply cutting the rate of growth of spending," said David Henderson. "What they need to do is cut actual spending. The deficit target will be reached more quickly, and cutting actual spending is more credible."

"The U.S. government has a long-term deficit and debt problem and the best way to solve that is not to increase taxes, but to decrease spending. Congress should cut spending by 300 billion this year and higher amounts in future years. The government should end the wars in Afghanistan, Pakistan, and Iraq and bring the troops home.  Doing so would about $150 billion every year,” he said.

“The government should also end the program of extended unemployment benefits, which encourage people to stay unemployed. Economists at the Federal Reserve Bank of San Francisco found that in the absence of extended benefits, the unemployment rate would have been about 0.8 percentage point lower at the end of 2009, or about 9.2 percent rather than 10 percent,” Henderson said.

ENTITLEMENT REFORM

Veronique de Rugy:

"When Democrats proposed to reduce the expanding cost of health insurance by cutting spending over the next decade, Republican Party Chairman Michael Steele reacted by denouncing the cuts as a raid on Medicare," said de Rugy. "That response became a major GOP talking point. So unless they flip-flop on that issue, the Republicans will remain the party of Medicare."

"Since the deficit commission's plan did not address the nation’s spending crisis by failing to propose fundamental entitlement reform, some proposals in the Ryan-Rivlin plan were welcome news," said Veronique de Rugy. "There are several things I don't like about their plan, but it does address the programs that are at the source of most of our financial problems, like the explosion in Medicare and Medicaid spending."

"It’s evidence that there are some serious Democratic-leaning economists who are willing to talk about these reforms," she said.

Jason Fichtner:

"Eventually, Social Security will have to dip into the Trust Funds in order to pay benefits and the Trustees estimate that the bonds held in the trust fund will last to 2037," said Jason Fichtner. "After that, unless reforms are made, Social Security will only be able to pay approximately 75 percent of promised benefits. The sooner reforms are made, the more time future beneficiaries have to make adjustments to their retirement plans and the less drastic the changes will need to be."

"The president is unlikely to propose changes to the Disability Insurance program, despite the immediate attention that should be given to this program," said Fichtner. "Though many people don't realize it, Social Security is more than just a retirement program, it's also a disability program that protects workers from lost wages due to disability, and currently the Disability Insurance trust fund is set to run out in 2018."

Photo courtesy of Flickr user Nathan Borror.