George P. Shultz: How to Get America Moving Again



By George P. Shultz

The world is in turmoil and needs a stronger U.S. It’s time to wake the sleeping giant by taking these specific steps to rev up the economy.

Adm. Isoroku Yamamoto, who led the Japanese fleet at Pearl Harbor, had spent some time before World War II in the United States. After the attack, he allegedly said, with a sense of foreboding, “I fear all we have done is to awaken a sleeping giant and fill him with a terrible resolve.” Well, the giant is sleeping again. What does it take to wake us up? How many times can we be kicked in the belly before we take notice?

ED-AS534_shultz_G_20140808182611The world is awash in change that affects us and our allies. We must recognize this and strengthen our military capabilities, set effective strategies, and be prepared to support our principles and oppose those who seek to destroy them. To do so, we must get our economy really rolling again. How? Everyone knows how. We just need to take action:

(1) Cleanse the personal income tax system of deductions and lower the marginal rate on a revenue-neutral basis. The template is right there in the 1986 Tax Act, which passed the U.S. Senate 97-3.

(2) We all know that corporate taxation is an anachronism. Why do we want a system that encourages American companies to reincorporate abroad? Let the earnings they make in other countries be taxed there, and that’s it. Why give incentives for companies to keep their cash offshore rather than invest it in the U.S.? And let’s lower the corporate tax rate to be competitive with the rest of the world. How about 20%?

(3) We all know that the maze and uncertainty of the regulatory octopus is stifling the economy. Regulations are needed, but they can be made simpler and designed to work better. Overhaul the current complexity so that even small businesses can see how to comply without having to hire compliance advocates they can’t afford.

(4) While we are reducing uncertainty, why not take the mystery out of the Federal Reserve? The Fed can establish a rules-based monetary policy with the ability to deviate from the rules as long as they publicly explain why, using cost benefit thinking in the explanation.

(5) Get control of spending. Otherwise the burden of servicing government debt when normal interest rates return—a burden that already amounts to hundreds of billions annually—will be unbearable.

The problem is entitlement spending. There are many well-known ways to put the Social Security system back on track so it will be there for young people in the future. One way is to change from wage-indexing to price-indexing as a method of calculating benefits, and apply the change only to people under the age of 55. That means younger people will receive benefits at least as large as those now being paid with protection against any future inflation.

Another change is to index the normal retirement age—when people can receive full benefits—to longevity. And when workers reach age 65, stop any payroll deductions and employer contributions to encourage them to stay in the labor force. Their pay will increase and they will be less costly employees. Incentives work.

(6) Health-care finance is more difficult, but here is a simple formula to use as a basis for further work. Right now, health-insurance companies are pass-through agents that receive money from the government, employers, and other sources that they spend on a wide variety of health services. But insurance is about risk. The main risks in the health-care area are catastrophic events that have high costs, so high-deductible catastrophic insurance is what is needed. Even young people will buy such coverage because the cost—particularly if insurance companies have to compete across state lines—will be low and the protection these policies give is important for everyone.

Let’s encourage health-savings accounts. Singapore has required health savings accounts and price transparency since 1984, and even the poor who get government support are motivated to spend carefully. According to World Bankfigures, the total public and private spending on health care in Singapore is 4.7% of their GDP compared with 17.9% in the U.S. The outcomes and health-care facilities in Singapore are among the best in the world.

Most people who make a decent living can afford to put pretax income into health-savings accounts, which they can then use to pay for routine medical services. We also should tweak Medicare and Medicaid so that significant health-savings accounts can be created for their recipients—so most everyone can have access to the health care system. And consumers need more information about the prices of health-care services so they can make informed decisions.

Finally, we should encourage public and private neighborhood health clinics, which are spreading rapidly and can dispense health care inexpensively.With these changes, the economy will soar. It will be morning once again in America.

What about our defense and foreign policy? Let’s put our military to work figuring out what we really need. We want no-nonsense people in charge. We want to do away with all nonsensical across-the-board sequester rules. But we must have a robust military capability. And then we need to conduct ourselves in a credible way.

I always remember the day in Marine Corps boot camp when my drill sergeant handed me my rifle. He said, “This is your best friend. Take good care of it and remember: Never point this rifle at anybody unless you’re willing to pull the trigger.” The lesson—no empty threats—was one that I have never forgotten. But this boot-camp wisdom is too often ignored, undermining our credibility.

America needs to work closely with its friends and allies. There are many of them. They need leadership and example. The problems ahead are too numerous to enumerate, but the threats to us and our friends are real. So, wake up, sleeping giant! You have work to do.

Mr. Shultz, a former secretary of labor, Treasury and state, and director of the Office of Management and Budget, is a distinguished fellow at Stanford University’s Hoover Institution.

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