For the medium to longer term, we need to put into place policies that will encourage sustainable economic growth. Here I discuss 8 important areas for reformulation of policy.

1. Green Policy: Economic sustainability will require more attention to the environment. This is an area that Obama has already identified as important, and I have no special expertise here. I would simply caution that economic recovery could reverse the course of oil prices (likely back toward $80 per barrel). Some combination of pressure on our oil producing "friends", subsidies for alternative energy and conservation, and energy costs relief for low income households will be needed.

2. Payroll tax reform: Payroll taxes are regressive, discourage work and employment, are inflationary because they add to labor costs, and reduce American competitiveness against all countries that do not tax work. Further--and this might come as a shock to readers who have bought into the claims made by intergenerational warriors financed by the Concorde coalition--the taxes are far too high, generating revenue that is about one-third higher than necessary to equal all OASDI (Social Security) spending. As part of my package of policies to deal with the current crisis, I recommended a payroll tax holiday. To placate the snake oil salesmen at Concorde, we can have the Treasury directly make all Social Security payments during the holiday (they do it anyway, even when we are not on holiday), and credit the Trust Fund with the one-third extra tax revenue that would have been received (again they do that anyway since the Trust Fund is just a Treasury promise to pay Social Security payments when they come due). Now what should we do when the holiday comes to an end? I have the audacity of hope to believe that we can end the intergenerational fighting, that we will finally recognize that promised Social Security benefits can and will be paid as they come due, and that we can end the nonsense about accumulating Trust Funds (Treasury IOUs owed by the Treasury to itself) to take care of future retiring babyboomers. Unless babyboomers can eat Trust Fund IOUs, they are no better off if the Trust Fund is filled with quadrillions of Treasuries than they would be without a Trust Fund at all. So let us stop pretending, recognize Social Security promises for what they are (commitments by sovereign government to credit bank accounts on schedule), accept the social commitment to ensure a decent retirement for all Americans (which will depend on our capacity to produce the real stuff retirees will want, plus our ability to import), and come up with a better way to redistribute resources from those of working age to those of retirement age. After all, that is really what payroll taxes are all about (taking income away from those accruing it to ensure they don't consume everything). It makes far more sense to tax all sources of income, in a progressive manner, to share the burden of taking care of a growing elderly population. Can we financially afford growing numbers of babyboomer retirees? Of course. See my previous post on affordability. Can we ensure they get enough real resources to achieve the standard of living they expect at retirement? Probably, but that has nothing to do with affordability or payroll taxes. All it requires is that we a) provide sufficiently large credits to their bank accounts, and b) put at their command a sufficient quantity of real resources.
3. State and local government revenue: The "devolution" that has taken place since the early 1970s puts more responsibility on state and local governments; in response they have increased (mostly) regressive taxes such as sales and excise taxes. As discussed in Part One of my policy proposals, they need immediate assistance because tax revenue is plummeting. Once the crisis is past, we also need to encourage them to move away from regressive taxes (in the average state, poor people pay twice as much of their income in state and local taxes as do the rich). I suggest we offer federal government funding to states that agree to eliminate regressive taxes, on dollar-for-dollar basis.
4. Inequality: Some comments I have received on previous posts wonder whether I have left out inequality. Not at all. The rise of inequality is a major contributing factor to the run-up of household debt: stagnant real wages for most Americans in the face of rising expectations (largely thanks to emulation of Hollywood and Wall Street) encouraged the debt binge. Hence the current financial crisis is indeed related to the rise of inequality--both because of stagnant incomes at the bottom and because of soaring incomes at the top. Many processes contributed to rising inequality; and I have already alluded to the reversal of the early postwar trend that saw poverty rates fall by half by the mid 1970s--and then virtually no further reduction since. I won't go into all of this in detail, but the emphasis on stimulating private investment as well as the public subsidies of consolidation and the promotion of finance over industrial enterprise all encouraged rising inequality. I also agree with Dean Baker that the weakening of unions played an important role. What Jamie Galbraith has called the "predator state" has also played a major role as Cheney and his minions have richly rewarded their friends. So, yes, we need to reverse those trends. Thankfully, Wall Street has already taken care of most of the excessively rich, downsizing their wealth and incomes to an extent not seen since 1929. Now we only need to drive a stake through the heart of finance to ensure it cannot recover. Next we need to get incomes rising at the bottom--more below.
5. Health care: While much is made of the "unfunded entitlements" of the public leg of the healthcare stool, the other two legs (the employer funded leg as well as the patient funded leg) and are also broken and collapsing. In our "global economy" one could not imagine a worse design for health care than the one that has evolved in the US--highly inefficient and employment-killing as it saddles employers with costs. Sooner or later, it will be reformed. We might as well do it now: nationally funded and universal access to reasonable health care, with a much smaller privately funded system for nose jobs and other elective treatments. Note: nonprice rationing will be necessary. It makes no sense to devote 80% of healthcare spending to the last dying gasps of life. For those unwilling to accept rationing of care, buy extra insurance and build up savings.
6. Infrastructure and social spending: I have argued that government spending needs to operate like a ratchet: increase in bad times to get us out of recessions, and increase in good times to generate demand for growth of capacity. What should we spend on? Infrastructure, social programs and jobs. We've got a nearly $2 trillion public infrastructure deficit--just to bring America up to the minimal standard expected by today's civil engineers. I hope that all readers concede that is a low standard. I can remember when all the kids expected levitating bullet trains coast to coast and perhaps even rocket ship transport to Martian Seas vacations by the early 21st century. Here we are a half century later stuck in traffic in gas guzzling dinosaurs that aren't that far removed from the finned Buicks our grandparents drove. If anything, our relative dearth of public services is even worse than it was when J.K. Galbraith brought it to our attention. And our needs are much greater--wealthy (and aging) societies need services, many of which are best provided outside our for-profit sector. The long fashionable belief that the market knows best, that it is well-suited to providing everything from eldercare to healthcare and to education, now seems crazily improbable. Heck, the market couldn't even do a relatively simple thing such as determine whether someone with no income, no job, and no assets ought to be buying a half million dollar house with a loan to value ratio of 120%. Jimmy Stewart's heavily regulated thrifts successfully financed far more housing with virtually no defaults or insolvencies, and with none of the modern rocket scientist models that generated the subprime fiasco. Let the market mow lawns; leave the important stuff--education, child and elder care, health care, military and security services, and other social services--to government.
7. Financial reform: The market has decisively spoken: it is not capable of self regulation. It cannot tell who is credit worthy. It cannot be trusted to innovate new products. It cannot be relied upon to determine compensation schemes. It makes terrible credit allocation decisions. It cries out for downsizing and heavy-handed re-regulation. In short, it is telling us that government of Goldman, by Goldman, and for Goldman is no way to run a country or an economy. Obama needs to listen.
8. Jobs: OK, believe it or not, I've saved the most controversial proposal to last. I believe that anyone who is willing and ready to work ought to be working. I even believe that able adults ought to work, rather than relying on hand-outs. These beliefs have been labeled everything from slavery to communism. However, I think these principles are consistent with capitalism and with the United Nation's Declaration on Human Rights. Here are the problems: first, capitalism has no internal processes to ensure full employment of labor resources; second, policy always acts to ensure that full employment will not be reached on the belief that it will generate inflation. John Maynard Keynes explained the first point: firms hire the amount of labor they need to produce the amount of output they expect to sell. The existence of unemployed labor will not induce employers to hire more, even at lower wages, for the simple reason that additional production is not warranted by expected sales. The second point was developed as Marx's reserve army of the unemployed argument, updated as a Phillips Curve trade-off, further transformed as Milton Friedman's natural rate hypothesis, later bastardized as the Lucas surprise hypothesis, rejected by Real Business Cycle claims, and finally revived as the New Monetary Consensus. Transcripts from FOMC meetings conclusively demonstrate that the Fed fights against falling unemployment by raising its target interest rate in an attempt to slow economic growth. Whether these policy actions have the desired effect is beside the point. What is clear is that policy-makers oppose provision of a sufficient supply of jobs to satisfy the demand for them, on the belief that if everyone is working, inflation will result. Let that sink in for a moment: if everyone is gainfully employed producing the stuff we Americans want to consume, that will be more inflationary than an economy in which we maintain, say, 10% of the employable population in enforced idleness, subsisting on handouts and producing nothing of use. Only an economist could come up with such an outrageous proposition. It sounds silly because it is. (Joan Robinson used to argue that one should study economics in order to identify the lies economists tell.) I do not have the space here to explain what is wrong with the conventional views or to detail an alternative. Let me just say that Obama is on the right track when he sets a goal of creating millions of new jobs, many of which will be created through programs modeled on the New Deal. He can and should go much farther: there is no reason to constrain the supply of jobs. Provide them without limit to anyone willing and ready to work. Give them useful things to do (see above for ideas). And here is the most important thing to do to ensure this will not be inflationary: set a fixed price (nominal wage) and float the quantity (hire those that show up to work). Offer a living wage and package of benefits but do not bid against the private sector if it is willing to pay more. In this way, the government's jobs program will operate like a buffer stock, expanding in recession when private jobs are scarce and their wages are falling, and shrinking in a boom when the private sector bids workers away. This also makes the government's budget move countercyclically: more spending in recession; less in expansion. Earlier I noted that a key to ensuring that government spending is not inflationary is to make sure it doesn't increase demand beyond full employment. The job program I am describing here is an automatic stabilizer: spending increases up to the point of full employment, and then no farther. Full employment without generating inflationary pressures. But can we afford it? You betcha.

This package of policies will help to restore sustainable economic growth, putting America on a new path to an even better Golden Age. It will reduce inequality, shift the emphasis away from private investment toward consumption (out of earned income, not debt or welfare) and public spending, reduce the role of high finance, and provide better services and more secure retirements for our aging baby boomers. Still, as Minsky argued, we have to be diligent because the stability created by these policies will encourage experimentation by profit seekers to push risky practices. This means that the policy-maker's work is never done. New challenges will arise--but that is no reason to forego Golden Ages.