America, Inc.

When I worked as a management consultant two types of companies came to us for help.  The first type was companies seeking an edge, to go from good to great, maybe improve their ROE by a few points. The second type was companies that were in deep trouble and needed a new strategic direction, an overhaul in their operations, or a financial restructuring.  Today I am a stakeholder in an organization that is mired in debt, runs huge losses year after year, has given up market share to its competitors, has no focus to its mission, and can no longer make decisions at the top.  If the United States were a company, it would be in desperate need of a major restructuring.

Look at our tax system.  Many of us experience the annual ordeal of completing our federal, state, and local income tax returns.  Worse, each year the federal government spends $1.1 trillion on tax expenditures – more than our current federal deficit.  These are the tax breaks and preferences that interest groups and politicians hide in the tax code as if nobody will notice the economic distortions.  Few have stopped to think that the entire income tax approach to raising government revenues is needlessly complex and economically inefficient. When advocates propose adding a VAT in this country they miss the point: we need to scrap what we have and start over.  Alan Viard at the American Enterprise Institute along with Robert Carroll from Ernst & Young have shown that you can eliminate the income tax system, introduce a progressive consumption tax (yes, rich people can still get hammered), and maintain revenue neutrality.  They also demonstrate that the economy will add 6% to its long-run output if we do so, maybe more – and perhaps serving us the proverbial free lunch in the process.

Our health care system is in even worse shape. All this talk about improving access and “bending” the cost curve has obscured the problem.  Our spending on health care in the United States is catastrophically high.  Recent OECD data for national per capita health care expenditures show an average of $3,265 for the 34 countries they track.  The figure for the United States is $8,233, which means that our country each year spends $1 .5 trillion more than would the average, similarly-sized developed country.  That gap is about 10% of our GDP.  Harvard health-care economist Michael Chernew has shown that almost all of our economic growth in the last decade has gone to offset increases in our health care costs.  Are we really better off?  Our goal as a country should not be to lower the rate of increase in health care costs, but something truly ambitious like cutting the cost in half (at which point we would spend only 25% more per capita than the average peer country). The health-care-government- industrial complex will surely scoff at such a notion, but its self-interest is obvious.  We need to break this system and start from scratch.

And then there is our legal system.  For most of our economic history the U.S. legal system contributed to our national prosperity by protecting property rights, providing clear and rational rules of the game, and resolving our disputes without corruption.  Over the last fifty years, however, “innovations” in our legal system have added a dead weight to our economy.  Litigation has become sport, jackpot judgments the goal, now even risk capital is being used to fund lawsuits.  Virtually no other country awards punitive damages in their civil justice system, nor have our trading partners adopted our style of class actions and contingency fees.  We have forgotten that the purpose of the tort system is to provide compensation to injured parties and deter future harms.  Without deterrence there is no economic benefit to having a tort system, yet the academic studies cannot find deterrence anywhere – not in medical malpractice, auto accidents, or defective products.  Witness New Zealand, which jettisoned the tort system altogether in 1974, after the famous Woodhouse Report concluded that the tort system was in all respects a failure. Tort litigation does not just transfer money from one party to another, it also imposes enormous second-order costs on our economy.  While these numbers are often disputed (my own research shows the annual wealth loss from the tort system is $1.3 trillion), with no benefits to speak of even small costs are a waste. We are dissipating our national treasure out of a false sense of what constitutes justice. Tort “reform” is small minded; it needs to go altogether.

Just in these three policy domains our country groans under the weight of trillions in unnecessary burdens, yet the gap between the severity of our problems and the proposed solutions is breathtakingly large.  The hysteria in response to the President’s proposal to shave ¼ point off the annual increase in social security benefits suggests our country is unprepared to address its predicament.  Perhaps this is why our national leaders fiddle with matrimony and firearms while the firmaments of our economy are burning to the ground. We ponder little ideas to fix big problems at our long-term peril; what is required is a full-scale restructuring of America, Inc.



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