Will the Next 20 Years Be More of the Same?

The day after Thanksgiving is usually reserved for my annual trek to the attic. Christmas lights, ornaments, bows and extension cords are on my mind. What I wasn’t thinking about was the state of our nation and the challenges we face.  When I opened a box that I thought was lights, I found binders of newsletters that were published by Sumichrast Publications, the company my father started after his retirement as Chief Economist of the National Association of Home Builders in 1987. I had the privilege of joining him in that venture as I worked on my college degree. We published over 200 reports in 5 years. One of the first newsletters we did was called Mike Sumichrast’s STRAIGHT TALK (20 years before McCain’s Straight Talk Express). As I read one of the issues, I keep glancing at the date of the newsletter…January 15, 1989. Could it be that many of my father’s warnings about the challenges we faced in America had come true? And, will the next 20 years bring more of the same?

In that issue he wrote:
“Our nation’s prospects for being competitive and keeping our high standard of living seem rather dim unless we change our dependence on borrowing from foreigners, improve our education, start saving and stop killing each other. To do this we will have to change the enormous influence of the lawyers running the country. The chances of that happening are next to nil.”

Sound familiar?  He went on to give his reasons why:

“In terms of people, we are not growing as fast as the rest of the world. In terms of competitiveness, we are being outperformed by many nations. Our product quality has been declining. Our trade balance has changed from surplus to deficits. We are now a debtor nation.”

“We lost supremacy in the financial world to the Japanese. Our dollar buys less now than ever before.”  [I believe all you have to do is substitute China or India today for Japan. Certainly the dollar is cheaper than it was in 1989.]

He summed it up by saying:

“We have been living high on the hog, ignoring the ultimate consequence of a debt-ridden nation.”
 He also called for the US to confront the growing drug problems that lead to high crime rates and most important, “getting our children prepared for a more competitive world.”

How Have We Changed In The Past 20 Years?
There are many facts that my father wrote about and I feel it’s important to update them through today.

1. “Congress is run by most lawyers.”  In 1989, the House was 42% lawyers and the Senate had 63%.  In the new Congress of 2009, those numbers will be 40% and 59%. I guess for the most part lawyers are still running things.
2. “The last surplus was under Nixon.”  Since 1998, the past 20 years have produced 16 deficits and 4 surpluses (from -$412.7 billion to a + $236.2 billion).  The total red ink for the past 20 years is a staggering $3.2 Trillion. And it’s going to going to get much, much larger in the next 2-3 years. We must force fiscal restraint… and it should not a political issue…this is a survival issue for our kids and grandkids!
3. “Congressional salaries continue to increase.”  In 1989 a House Member made $89,500, a Senator made $89,500, and the President made $200,000.  Today those numbers are $169,300, $169,300 and $400,000 and increase of 47%, 47% and 50%. That’s actually not too bad at just under 4% per year increase.
4. “Why don’t we cut taxes?”  Top tax rates in 1989 were 34% for corporations and 28% for individuals.  Today those numbers are 35% and 35%.  In 1989, the top 10% of individual earners make 39% of the income and paid 56% of the taxes.  Today those numbers are 47% and 71%. So basically, even though the rich are getting a larger share of the pie (20% increase), they pay more of the “tax” pie (27% increase).
5. “Growth rates of undeveloped countries account for 78% of the world’s population compared to only 69% in 1969.”  Today those numbers are 82%.  The world added approximately 1.6 billion people since 1989. This represents a huge opportunity for US businesses and investors, but we must have fair trade agreements that allow us access to foreign markets, the same way that the world gets access to our market.
6. “We seem to be at the bottom of the educational heap in spite of the fact that we spent more than most other nations.”  We spent $302 billion on elementary and secondary education in the 1994-95 school year.  In the 2004-05 school year, we spent $536 billion.  The United States ranked third in annual secondary education expenditures per student in 2004.  In 2005, the high school graduation rate was 76%, ranking 20th among international graduation rates. This statistic always bothered my parents, who both received Doctorate degrees from Ohio State, after being in the US for less than 10 years. It’s a shame and we must do something about this problem. But money won’t solve this…parents must take the lead and homework and grade matter!
7. We have the dubious distinction of being the most crime ridden country in the world.  We recorded more than 20,000 murders in 1989.  That number was down to 16,929 in 2007.  The United States currently ranks 24th in murders per capita internationally. This is actually some good news. Of note though, ten of the countries above the US are Russia and former Soviet bloc countries that have moved the US down the ranking since 1989.
8. In 1989 we had 3 million people under correctional supervision of which 600,000 were in jail.  Today there are around 7 million under correctional supervision of which 780,000 are in jail. This is just plain sad.

The Future: The 7 Step Plan to Start the American Turnaround
Step 1:  Help Housing – As I stated in an earlier blog entry, the government has to step in to help stabilize foreclosures which will help curve the downward slide in home prices. Shelia Bair, the head of the FDIC, has proposed a plan that can help and is cost effective. Also, Congress needs to grant judges the power to reduce principal of home loans for borrowers who are in bankruptcy reorganization (Chapter 13). Currently, this can only be done for commercial loans. The key is to keep the homeowner in the home. The last thing we want is for the banks to pile on more real estate owned (REO) properties on their books. Banks are crummy landlords and only will dump the properties on the market, further depressing prices. It would cost them less in most cases to keep the homeowner paying, albeit a lesser amount.

Step 2:  Reward Savings and Encourage Investment – Increase the limits that individuals can put into their savings accounts tax free. Eliminate the capital gains tax for 3 years, then increase it 5 percent every year until we get back to the 15%.

Step 3:  Tackle Entitlements – If I had the magic bullet, I would tell you, but I don’t. With over 60% of the Federal Government made up of Defense, Medicare/Medicaid and Social Security, we can’t balance the budget without dealing with entitlements. I am afraid that it will take cuts or at the very least freezes at all levels to accomplish anything significant.

Step 4:  Balance the Budget, Stop the Waste– We can throw this out the window for 2009 and 2010. But we must try and stop the waste in government. If you can reduce the waste by only 1%, you save $29 billion each year. For example, in the mid 1970’s my father was part of a commission asked by President Ford to review the budget. He found that in 1975, there was a program funded to give a certain group of American Indians assistance. However, due to the governmental bureaucracy, for every dollar the plan spent, less than a nickel ended up in the hands of the Indians. My father used to say, you could write each Indian a check for $25,000, save half the expenditure and give the Indians 10 times as much. 
Step 5:  Reintroduce Parenting and Get Back to Basics in Education – Start with eliminating the Department of Education in Washington. It’s a waste and a failure. Return education back to the states and local levels. Get competitiveness back in schools. Outsource failing schools to private enterprise. Look what DC Superintendent Michelle Rhee is proposing (http://www.washingtonpost.com/wp-dyn/content/article/2007/11/17/AR2007111701410.html); and for goodness sakes, get parents involved in their kids’ school. Teachers can only do so much. We need to get back to basics. Reading, writing and arithmetic have to be the foundation of an education.

Step 6:  Get a Real Energy Plan…Learn How to Do More With Less – Thank you T Boone Pickens…you really pushed energy independence into the public eye. When gas was at $4.00 per gallon, it made Americans take notice. Now we are filling up at $1.50 and America is back to its old habits. We can’t forget what it felt like this summer. I suggest that Congress enact a gas tax whose funds will go 100% to the development of alternative fuels and energy. Also, give Americans rebates to buy fuel efficient vehicles. Also, we must drill and drill now. Finally, solar and wind power is excellent, but the real power engine is nuclear power. Stop the crazy talk about it being harmful. It’s safer than driving.

Step 7:   Pass Stimulus for Infrastructure, But Watch the Checkbook – While I like Obama’s plan to spend on infrastructure (China is doing it, although they have savings to pay for it), its scares the hell out of me thinking about the waste and corruption that a $500 billion stimulus could bring. Bridges and roads are great employment generators and the country needs the refurbishment.  However, if we don’t watch every dollar, this has the makings of a colossal pork dinner for those at the trough.

Final Thoughts
On December 1, 2008, the National Bureau of Economic Research told us what we already knew; we are in a recession. But they surprised many by stating that the US had been in a recession for 12 months. Was this supposed to make us feel better or worse?

The optimists say this is great news, pointing to the fact that the last two recessions were 18 months in duration which now proves that we are more than half way out of this one and we should be in full recovery by the end of the second quarter of 2009. 

The pessimists say, not so fast. We are in a two leg recession. The first leg was from December 2007 through August 2008, and then the credit crisis hit and caused a second leg.  This would dictate that we should start the counting from September 2008 and go for 18 months, putting the recovery off until the 1st quarter of 2010. It may be even worse if we hit a deflationary period similar to Japan’s recent 10 year slump.
I think the answers to our recession questions will be tied to what measures President Elect Obama and the new Congress take in the coming months. A large part of being an effective President is confidence and charisma…and Obama oozes both of those. My hope is that he will come to the middle , abandon partisanship, shed the special interests and really make the hard decisions that the country needs right now. Because one thing is for sure, we can’t continue on this path for another 20 years.

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