A System in Need of an Update

Published September 6, 2011

The New York Times Room for Debate

The United States, and our Western capitalist partners, have entered a new economic era. Intense global competition has suppressed wages in some industries that had uncompetitive cost structures. And because political leaders of both major parties have for far too long emphasized consumption and income protection at the expense of investments in the future, the adjustments necessary to provide new opportunities to replace lost employment have been slow and inadequate.

Meanwhile, as economic pressures have intensified, it’s become clear that the social welfare arrangements built decades ago by governments and employers are no longer viable, especially in view of the unprecedented demographic transformation—rapid population aging and slow or stagnant labor force growth—now underway in the industrialized world.

There’s no retreating from these challenges, especially global competition. What policy makers must do is get the policy fundamentals right again so that dynamic economic growth in the private sector can once again generate new opportunities for the middle class.

First and foremost, that will require facing fiscal reality with regard to entitlement reform at both the federal and state levels of government. Rapid growth of entitlement spending is already putting severe stress on government finances, and the problem will become even more acute over the next two decades as the baby boom generation heads into retirement. Programs written for the 20th century need to be updated to reflect the realities of today. Most especially, the nation’s health entitlement programs need the discipline of a functioning marketplace to replace the government’s ineffective command-and-control structure.

Entitlement reform can pave the way for pro-growth tax reform. The federal tax law for individuals and corporations badly needs to be rewritten, with an emphasis on simplicity, low rates, a broader tax base and taxation of consumption rather than investment.

The formula for private sector opportunity and growth is not a secret. Fiscal restraint, low marginal tax rates, free trade and a strong and stable currency have worked before to restore dynamism to our economy, and, with time, they will work again—if tried.

James C. Capretta is a fellow at the Ethics and Public Policy Center. He was an associate director at the Office of Management and Budget from 2001 to 2004.

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