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Fixing inequality

By Peter Morici
web posted January 20, 2014

Inequality is replacing the American dream, because the U.S. economy—thanks to Washington's mismanagement—is underperforming.

America still produces one fifth of the world's goods and services, but accounts for a much smaller share of global growth. Many U.S. products are no longer the best in class. Consequently, the economy can't adequately employ many of its college graduates, and wages are stagnant or falling for ordinary folks.

America still has great strengths. High labor productivity, coupled with rising wages in Asia, make American workers a good value for global investors. Along with cheaper energy, thanks to the onshore oil boom, that should attract new factories, but the promised flood of new jobs has only been a trickle.

Simply, the bureaucratic quagmire created by complex and ineffective business regulations makes it easier to produce in Asia than in America. The highest corporate tax rates among major industrialized countries make the cost of investing here too high.

It is increasingly difficult to refine and efficiently move oil to California and the Northeast—gasoline costs too much in Monterrey and heating oil in Massachusetts.

Whether businesses are taxed or directly pay for health care, higher costs than in Europe or Japan require radical reforms in delivery and pricing that Obamacare will not accomplish and Republicans refuse to discuss.

Germany punches above its weight. Whether in aerospace or web-based businesses, its companies compete effectively for customers in rapidly growing developing country markets by emphasizing proven technologies, execution and patience.

Cities from Bangkok to Lagos are too congested and cluttered with street vendors to support American middle-class drive to the mall retailing. German firms like Rocket Internet are recruiting suppliers and sending young women with tablets into marketplaces and workplaces to demonstrate their websites.

American companies eschew such boring approaches in search of big profits to pay for Uncle Sam's terribly burdened regulations and taxes.

Apple will only sell the very best for the highest price, while Microsoft ties up PC customers with awkward software. Now, too few Americans can afford an iPhone and even fewer want a Windows smart phone. Korea's Samsung offers state of the art handheld devices and gives American companies fits.

In a globalized economy, America must play its strengths. It can't continue to permit China and other Asian nations to rig their currencies, and otherwise lock out competitive U.S. exports with subsidies and protectionist regulations. In Asia, the Bush and Obama Administrations have placed higher priority on other goals.

America shouldn't import 6 million barrels a day of oil and pay the cost of policing the Persian Gulf, when opening up offshore drilling and smart conservation could eliminate foreign purchases.

Together, the trade deficit on otherwise competitive manufactures and oil is costing Americans 5 million good-paying jobs—many that would go to struggling working class families.

America's best and brightest can earn big bucks by heading for Wall Street, the Silicon Valley and industries that innovate and sell in global markets. Meanwhile, the army of more ordinary workers remains underemployed and underpaid.

A slow growing economy is the cause of increasing inequality, and the best way to reverse those is to clear a path for investment and entrepreneurs. The ticket is to streamline regulations, simplify and cut taxes, open up offshore energy production, radically reform health care, and make exports and jobs America's number one foreign policy priority.

With lower taxes how would Washington pay for entitlements and a big defense budget? Simply, an American economy growing at 5 percent and producing its own energy would need less of both, and generate a bounty of government resources for good purposes like the world has never seen. ESR

Peter Morici is an economist and professor at the University of Maryland Robert H. Smith School of Business, and a widely published columnist. On Twitter @pmorici1





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