"Mankiw's Message to President-Elect Obama"

President Bush's former chairman of the Council of Economic Advisors and Harvard Professor Fregory Mankiw has a message for President-Elect Barack Obama.

Congratulations, Senator Obama. You ran a good campaign, and you racked up an historic victory. As you get ready for your new responsibilities, let me suggest four ways for you to become a reliable steward of the economy:

Listen to your economists. During the campaign you assembled an impressive team of economic advisers from the nation’s top universities, including Austan Goolsbee from University of Chicago and David Cutler and Jeff Liebman from Harvard. Your campaign’s director of economic policy, Jason Furman, is a smart, sensible, and well-trained policy economist. I know: He is a former student of mine.

Pay close attention to what they have to say. They will often give you advice quite different from what you will hear from congressional leaders Nancy Pelosi and Harry Reid. To make sure you hear the views of your economists, put them in offices close to yours. Tell your chief of staff to invite them to all the relevant meetings.

Embrace some Republican ideas. No party has a monopoly on truth. Be ready to take the best Republican policy proposals and make them your own, as Bill Clinton did with welfare reform in 1996.

Health policy is a case in point. Over the past several months, you lambasted McCain’s proposal to reform the tax code to include a refundable health insurance tax credit. Did you know that long before McCain ever proposed this idea, it was advanced by Mr. Furman, your campaign’s policy director? He can explain to you why the Furman-McCain plan makes a lot of sense.

Now you may decide that this plan does not go far enough. You may want a more generously funded social safety net to help the less fortunate get health care. Fair enough, but in pursuing that goal, you run into the next issue.

Pay attention to the government’s budget constraint. The nation faces a long-term imbalance between government spending and tax revenue. The fundamental problem is that the federal government has promised the elderly more benefits than the tax system can support. This fiscal imbalance will become acute as more baby boomers retire and start collecting Social Security and Medicare.

Yet during the campaign, you promised that you would cut taxes for 95 percent of Americans, that you would vastly expand health insurance coverage, and that you would never cut Social Security benefits or raise the retirement age. You will almost surely have to renege on some of these promises. As your economic team will often remind you, even if the laws of arithmetic are ignored during campaigns, they provide a real constraint when making actual policy.

Recognize your past mistakes. As a new senator, you voted along predictable left-wing lines. As president, you will need a more eclectic, nuanced approach.

Take trade policy, for example. In the senate, you voted against the Dominican Republic-Central American Free Trade Agreement. You opposed free trade agreements with Colombia and South Korea. You supported Senators Charles Schumer and Lindsey Graham in their quest to put tariffs on Chinese goods if China failed to revalue its exchange rate. You supported the Byrd Amendment, which encouraged domestic companies to file anti-dumping suits against foreign competitors. You supported subsidies for domestic producers of corn-based ethanol and tariffs on imports of more efficient sugar-based ethanol.

Your economists can explain to you why these positions were wrong-headed. Economic isolationism is not in the national interest. A high point of the Clinton presidency was the enactment of the North American Free Trade Agreement, which passed both the House and Senate with a majority of Republicans and a minority of Democrats.

This past Tuesday, many people voted for you hoping you would achieve the kind of economic success that Bill Clinton enjoyed in the 1990s. Your best chance of delivering what they want requires that you abandon some of your past positions and pursue a more moderate, bipartisan course.

"Time to Come Together"

Our country is facing many challenges. For many, including myself, there is much concern over the recent election of Barack Obama. What direction will he take our nation? What condition will he leave our country when his term in office ends?

We must unite as Americans to address these challenges. We cannot afford to be remorseful, but rather we need to be keen and share our voice with others. Perhaps this is an opportunity to open the American eyes to how socialist policies are not the path to U.S. global economic leadership but a path to global economic complacency. This could be what the United States needs to quell the desire for far left policies and restore an America based on its founding principles.

There are some things we can do. First and foremost, we can pray for our nation. As our country is moving in a direction to further separate our religious convictions from national policy, we can pray that our nation's true values will survive the far left's governance.

We don't often think of it, but a branded memory from my childhood education was saying the "Pledge of Allegiance" every morning. That is only one generation away from being forgotten! Not that saying the "Pledge" will save our country, but if reciting the "Pledge" is wrong as it has been deemed, what subtle changes can we expect in the future?

Second, we must listen to understand! I can even admit at face value that liberal policies seem attractive. Giving money to those who need it most, providing free health care to everyone, and giving everyone a college education are good things! They are... at face value! But we must communicate the consequences. Many of there arguments end here... at these face value statements. Look at many press articles and liberal activist statements that support these policies. Notice they don't include solutions and most do not understand the economic implications.

We can listen. We can understand. And we can explain the economic consequences of these actions.

In "An Age of Turbulence,"Alan Greenspan spoke on capatalist economics in Moscow to an audience of socialist economists in the early 1990's. He was surprised by their conceptual understanding of capitalism that was evinced in the follow-up question-and-answer session. Later, he engaged one of these economists on his knowledge of capitalism. The economist replied that economics is a science of numbers, formulas, and solutions. There is truth and freedom in numbers. He was implying the political freedom of economics.

Last, become active in communicating these values. We have many opportunities for this type of discussion. Let's take advantage of them. There were once times in this country that these were the only issues at the table. Now, it seems they have been taken completely off the table.

I will begin blogging about what will happen to our country in many respects under a socialist regime. Topics on the table include education, health care, taxes, along with many others. Perhaps these can serve as some tools based on facts to communicate your positions. As always, I would appreciate your continuous feedback.

"Incentives Matter"

Nearly every decision we make is driven by incentives. Why do we go to work? To receive a check every two weeks? Why did we spend $40,000 on a college education? Surely, because we believe it’s a good investment in the long run. What happens if these incentives were taken away? What could you expect to see in our economy?

In "An Age of Turbulence" Alan Greenspan recalled visiting the Soviet Union. At the time, the Soviet Union was an economic superpower and the two great competing economic theories were still in the midst of the Cold War. Greenspan recalls the Soviet finance minister assigning a senior aide to him with the task of explaining the centrally plan economic system.

Greenspan noted the complex and mathematically sound algorithms the Russians used to interpret their economy. He noted their "dazzling" mathematic capabilities. He remembers leaving the Kremlin in 1989 and seeing a farmer driving 1920 model steam tractor. He asked a security official, "Why do you suppose they still use that?"

Thinking little of it, the official said, "Because it still works?"

There was a similar conundrum after the fall of the Berlin Wall between communist East Germany and the democratic West Germany in 1989. In terms of GDP, East Germany only lagged West Germany by 15% to 25%. However, according to Greenspan, visiting both nations evinced a much larger difference in the standards of living. West Germany was at the leading edge of technology and East Germany was lagging. For example, there was a significant difference in the 1950 Mercedes and one built in 1988 in West Germany. However, the East German Trabant hadn't changed its design in over 30 years! East Germany never had the incentive to change in a centrally planned system.

There are many incentives to work: to provide for your family, to purchase property, to have health insurance, etc. To have increasing work opportunities, many spend longer in school to increase the probability of securing the many benefits of work. However, if these benefits are given away, truly how valuable are they?

If your idea of the "American Dream" is to earn property, health insurance, and a high quality of life, then perhaps you sacrificed dearly to earn an education and increase the probability of having these things. The sacrifice could be in time, long hours of work and studying, or a hefty student loan. If the government gives these benefits away for free - in the forms of wage increases, health insurance, or education subsidies - it discredits what you have worked so hard for. We will lose incentives to create the best, to provide the best, and to be the best.

-Reflection from "The Age of Turbulence" by Alan Greenspan

"Health Care: Progressive Change in a Digressive Direction"

It seems as though our leaders are lost at sea when it comes to addressing health care in America. In the 2nd debate with John McCain, Barack Obama declared he believed it is a right of every American to have health care. Barack Obama believes every American has the right to the same health care plan that members of Congress receive.

Let me first provide a few facts about our healthcare funding. Currently, Medicare is an enormous tax burden but future burden will break America’s back. This statement comes directly from the Trustees of Social Security and Medicare trust funds.

“If the Trustee's projections prove a reliable guide to the next few decades, absent an increase in earmarked sources of revenue for the program, in just 15 years payment of currently scheduled Medicare benefits would require General Fund transfers equal to 25 percent of Federal income tax revenues (projected at their historic level of GDP)—more than triple their 2005 fiscal burden—and less than 10 years later the General Fund transfer would equal nearly 40 percent of Federal income tax revenues.”[i]

The numbers are shocking! Consider even further the following facts:

1) In 1962, TOTAL programmatic spending on programs such as welfare, social security, and medical programs amounted to 32% of overall tax revenues.

2) Today, the same spending amounts to over 60% of tax revenues.

3) Today, Medicare accounts for roughly 16% of overall tax revenue outlays.

4) As mentioned above:
a) In 15 years – 25%
b) In less than 25 years – 40%

So, hypothetically, in 25 years 84% of all tax revenues will be going to social programmatic spending! That is, 60% today plus 24% (the difference between Medicare today and 25 years from now).

Note that these figures are on top of Social Security funds having a negative balance beginning in 2018 and being completely exhausted by 2038! Barack Obama has already ostracized conservatives for cutting back on Social Security expenditures. The only other way is to increase taxes!

If I were the President of the United States, I think now is a great time to announce free, government-sponsored, taxpayer provided health care for everyone! However, back here in reality, the government does provide everyone health care. Granted you may have to go to the emergency room, but you will not be turned away. Apparently, that is still insufficient.

It is time to come up with solutions, so what are they?

Notes:

[1] Social Security Administration. “Message to the Public.” 2006. <www.ssa.gov/history/pdf/tr06summary.pdf>