Chapter 10.	Economy
			Business/Finance
			Taxation
			Social Security
			Media , Censorship
			Consumer Protection
			Welfare
			Child Care
			Labor
			Housing


I. Economic Policy--Introduction

I place economy among the first and most important virtues, and public debt as the greatest of dangers … We must make our choice between economy and liberty, or profusion and servitude. If we can prevent the government from wasting the labors of the people under the pretense of caring for them, they will be happy.
— Thomas Jefferson

Without economy none can be rich, and with it few will be poor.
— Samuel Johnson

	As in many cases, there are two sides to each issue.  In our view of the system, the supply side and demand side coexist.  The demand side has been fully addressed in our discussions of government, Congress, regulations,  civil servants, and bureaucracies.  The supply side must now be examined.  In particular, these are the economic inputs into the system, the taxes and the economic incentives that exist which provide the impetus for work to be performed.  Even with our ‘the less government the better’ philosophy, government must be paid for.  Taxes, although disliked by everyone (“nothing is certain by death and taxes”) is the price we must pay for the government and those governmental functions/services we seek or need.  However, that structure of those economic systems can be varied.  This, then is the theme of this chapter, to present a unified thought of an economic incentive system that we believe would be best for this country as it is reengineered for the twenty-first century.










II.  The Problem--Tax Code

There is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible.  All do right, for nobody owes any public duty to pay more than the law demands, taxes are enforced exactions, not voluntary contributions.  To demand more in the name of morals is mere cant.  There is not even a patriotic duty to increase one’s taxes.      Judge Learned Hand.

A society that is more concerned about the redistribution of wealth than the creation of wealth is doomed to an equality of poverty---Jack Kemp.

The power to tax involves the power to destroy.
— John Marshall

	Taxes are traditionally judged according to three public finance criteria: simplicity, equity (more exactly fairness), and efficiency. A fourth criteria, some believe equally as important, is the ability to produce or provide impetus towards economic growth.  A simple tax is one that is easy to comply with and to administer.  An equitable tax is one that treats people in equal economic circumstances similar and people in different circumstances different (progressivity). An efficient tax is one that does not distort economic decisions, especially for those involving work savings in an allocation of capital.  The U.S. income tax system is none of those and even worse presents negative incentives in many cases actually inhibiting economic growth.  The tax code is not simple (a billion hours is spent filing out forms by America’s taxpayers, most needing professional help). Tax code costs are upwards of $200 billion per year in compliance, time spent filling out forms, paying others, researching or calling for advice.  This is both burdensome and paralyzing to small business.  The U.S. tax code runs to 38,000 pages . . . the tax rules relating to owning a car for one’s own business is 68 pages alone.  Chrysler’s CFO was dwarfed by his company’s  nine-foot high tax return while Citibank’s CFO showed the world his company’s 26 volume tax return.  It is also neither equitable nor efficient. Financing nationalized services is  'regressive taxation’ where the burden of which declines with rising incomes.  The rich are often subsidized by the working and lower middle class where everyone pays the same contributions.  Therefore in proportion to their wealth and income, the rich pay less than lower income groups. The tax code also clearly distorts economic decisions. If money flows to enterprises that never would exist without tax incentives, it flows away from enterprises that might survive on their own and thereafter are intrinsically more beneficial to the economy. It is not efficient since high marginal rates penalize work and encourages tax avoidance or cheating.  Higher rates will only end up with more tax avoidance and evasion.  Americans do worker harder and more when their taxes are lower.  Little is actually understood of the cost of high taxes: they raise the price of everything, including the cost of government itself.  If local taxes are high, schoolteachers will demand more money with which to pay their taxes, this in turn further boosts the costs of government; the greater the public payroll, the faster the spiral goes. As local taxes rise, low paid employees in private businesses demand more in order to keep their heads above water.  More skilled employees will demand high salaries to meet their costs of living.  Thus, the never ending spiral. The founding fathers shied away from income taxes, for nearly one hundred and fifty years the nation survived without it. The sixteenth amendment introduced in 1914 does not require the income tax, it only makes it possible; when it was first introduced the highest rate was a mere four percent.
	The World Bank in 1983, published a study, Taxes and Growth, by Keith Marsden, that showed that lowest tax rates brought in the highest revenues.  Appraising the economic performance of twenty countries, the study found that the countries with the lower effective tax burdens grew six times faster.  Thus they could raise their government spending and revenues on an average more than three times as fast as the countries with higher tax burdens. Japan increased public revenues during the 1970s 33 percent faster than Sweden and 44 percent faster than Britain and did it by lowering taxes every year during that time. The World Bank’s study also indicated that distribution of income tends to be more ‘equitable’, investment higher and inflation lower in lower-taxed countries, thus giving more than a little justification and legitimatization to the controversial Laffer curve.
	In 1992, Polyconomics of Morristown, New Jersey, examined the relationship between tax rates and economic growth between 1984 and 1989. The study confirmed the World Bank’s study and further determined that marginal tax rates explained between 80 and 90 percent of differing growth rates among the world’s twenty four leading economies.  Hong Kong was the fastest growing with the lowest rates; Denmark had the slowest growth with the highest marginal rate.  Thus, the inevitable conclusion that raising tax rates reduces government revenues and growth; lowering tax rates increases revenues and growth.  Marginal tax rates is also important.   The United States had a 51% marginal rate with a 18 percent growth while Japan had a 58% tax rate and yet a 25% growth; the difference postulated is that  Japan’s high marginal rates were offset by very low capital gains tax rates.
	The Arthur D. Little study of new technology-based firms in the United Kingdom and West Germany  argues that a tax system which successfully motivates inventors, entrepreneurs, and investors will more effectively stimulate innovation than any direct government assistance to new enterprises.The tax system is extremely influential in its effect upon venture capital formation and entrepreneurial activity.  It is not merely the absolute level of taxation that matters but more so is the direction of tax policy found Robert Genetski and John Skorburg of Chicago.  New Hampshire’s heyday as a tax haven, relative to the nation, was in the late 1970’s and early 80’s. This was also true for most of New England, including Massachusetts after its big tax cut of 1980.  When taxes drop, particularly relative to other states, the economy typically responds after a short lag.  This lag used to be three years but is now at half that, as news and capital travels faster. But with a boom, governments tend to spend and a contraction becomes inevitable.  By the 1980’s New Hampshire’s tax burden was rising relative to the nation.  And its growth slowed if not declined.  Peter Drucker confirms the notion that it is the structure of taxation which is more important than the level.  The configuration matters, not the amount. What is important, perhaps more important than merely the level of taxation, is the kind of taxes a government levies: do they encourage investment or consumption?  Speculation or productive investment?  Are they stable or rising?   California used its huge post-World War II surplus to invest in infrastructure projects including the fine University of California educational system. 
	Minnesota has been described as a ‘great place to start a business.’ It is conducive to start-ups because of its good access to venture capital, entrepreneurial base, and available skilled talent. However, once a company starts growing, the situation changes.  Personal and corporate income taxes and business property levies are among the highest in the nation.  Minnesota’s state and local tax burden as a percentage of income was third highest in the U.S. in 1989. Minnesota is among the top five states for ‘green’ spending and regulation.  Workers’ compensation taxes are double or triple that of neighboring states.  As a result, companies may be starting up in Minnesota but expanding elsewhere.  General Mills may be staying in Minnesota and increasing its R&D spending there, but its manufacturing facilities are being located elsewhere, in more favorable environs.
	Thus the more favorable the tax structure (lower marginal rate and lower capital gains and correct current direction of the tax code--down), the higher should be the economic growth of the society. The tax code should be used to create a dynamic climate for private sector growth and entrepreneurship. 
	The income tax code has grown in 80 years to thousands of pages of complex code. It needs not a facial but a complete overhaul. Estimates place the current tax code as a $200 billion burden on the economy--$100 billion now spent filing out tax forms and other forms of compliance and $100 billion wasted from investments being made for tax rather than economic purposes.What then should the optimum tax code look like, one that meets all four criteria. Several options exist:
	Despite wide variations of tax rules during most part  of this century, tax revenues have been remarkably consistent throughout the years at 19.8%.   Therefore, one alternative is a flax tax rate of 19% or not to exceed 20 percent on all individuals and companies.  This should exclude all interest income, dividends and capital gains (separate tax structure, see below).  All deductions  (except personal) would be eliminated.  Investment decisions would be based on economic return rather than on tax angles which lead to vast distortions in behavior.   Tax simplicity would result in less time and less money spent on tax advice (good for accountants but bad for the economy as a whole).   The Flat Rate system would work like this (with actual numbers to be determined later):  $5,000 deduction per individual for husband and wife.  Thereafter, $2000  per child for the first four children.  In essence, a family of four earning $20,000 would pay 20% on 6,000 or $1200 for an effective tax rate of 6%.  The same family of four earning $40,000 would pay 20% on  $26,000 or $5200, an effective rate of 13%.  The actual individual and dependent deductions could vary according to the levels we would want to be made exempt from the tax. Personal deductions would be indexed to inflation rate.Thus a sliding scale with low enough individual deductions would eliminate those low-income workers from paying any taxes; and  hence, this proposed system would eliminate any criticism about repressive.  We do believe in the Laffer curve, that lowering high tax rates would produce more government revenue, not less, people people would work harder and invest more.  By eliminating deductions, we gain an additional benefit: this would rid the nation of corrupting influence of special interests spent on politicians and bureaucrats to influence tax related rules and legislation. 
	Another rationale for this system goes back over three thousand years ago, to Joseph and the Pharaoh.  As a result of Joseph’s dreams, the Pharaoh implemented a  20% tax level  (one-fifth for the state) for the seven good years to provide for the downside during the seven bad years.  The Egyptian economy boomed because of the relatively low level of taxes and the stability of the level of taxes (allowing for long-term planning of the businessmen in Egypt), replicating the New Hampshire findings noted above. Fairness is the flat tax’s great virtue.  It is based on the idea of fairness, everyone should be treated the same.  Rather than have politicians decide--for their own reasons--which groups should surrender more or less of their earnings to the government, the flat tax sets a single objective standard.  The impact on the economy would be dramatic: stocks would rocket, savings would soar, new businesses would grow because of the increased pool of capital and because the capital gains tax would no longer act as a barrier to moneys moving from old to new investments. And tax receipts would mushroom; since it is well documented that tax receipts grow faster in low tax economies.
	Another option would be to abolish totally the income tax and replace with a national sales tax (or VAT--Value Added Tax--as it is called in Europe).   Exemptions would be provided for nitrations food and drink, prescription medicine as needed for illnesses, limits for housing and utility expenses.  This would eliminate any criticisms due to repressive nature of such a tax.  A national sales tax would also assist in tax collection.  Instead of scrutinizing 150 million individual returns,  the tax authorities would only have to examine 15 million entities (the number of business entities in the United States), not an especially onerous task  since those entities are already being examined by state agencies.  This option would  remove tax skews which currently exist in the tax codes.  By positioning the national sales tax as we have suggested, this policy would also tie in to a consumption based tax system, designed to create incentives to increase the national savings rate.  An alternative similar tax system would be to replace the personal income tax with a progressive tax on consumption.  Income would not be taxes so long as it remained in savings.  But money withdrawn from savings during the course of a year would be taxable, as would sums borrowed for consumption.  The more money spent, the greater the tax rate.   
	We are not so naive to believe that the current system’s problems with tax loopholes and complexity will never again arise.   Liberal interest groups share a desire to tax and spend other people’s money in the elitist presumption that the political class knows best. Even changing the political system to eliminate many of the demands and pressures of special interests, eliminating professional politicians, and minimizing government, special interests will creep in and begin to change what was once a relatively simple easy equitable system into a replication of the tangled web we have today.  At best, though, we have an entire generation before that situation arises, a generation of twenty to thirty years  where phenomenal growth can arise and the nation can resurrect itself.  It is hopeful that by the time the trends towards special interests begin again, that a new cadre of citizen governors and administrators, citizen lawmakers, raised in the new spectra of self-responsibility and temporary government service will be present to keep the momentum going and minimize any potential gutting of the revised simplified tax code. 
	As a second point,  a VAT is especially tempting to politicians, being seen as a gold mine for tax dollars the public never sees (in a true VAT as European politicians experience it,  taxes are paid on the value added for each transaction in the industrial chain, however, no taxes are paid at the consumer level).  That is why we espouse a national sales tax at the consumer level, a tax immediately felt by the consumers and any attempts to increase this tax will be quickly noticed and responded to by taxpayers.  If a VAT  is the way to go, we suggest once an initial level of taxation has been set, than in order to increase it a 3/4 vote would be necessary by both houses of Congress.  This is to prevent the camel, once his nose has entered into the tent, from sticking it in all the way (what once started out as a few percentage point VAT in most European countries has now reached a rate of nearly 40 percent in several countries).
	Even if the individual private enterprises change and attempt to present a long term approach, as long as the rules of the game demand short term returns, they will naturally have a short term orientation.  The rules (i.e. federal tax laws and economic incentives/disincentives) must be accordingly changed to provide the correct framework for the enterprises to successfully apply themselves. In essence, the current rules require a short-term outlook and penalize heavily any firm that attempts to seek the long term approach.  The critical  step must be to readjust the financial rules of the game to provide impetus and incentives to switch the economic outlook of firms and capitalists from the short term (i.e. quarters) to the long term (decades). This step must be taken at the national and local governmental levels and quickly. As seen above, the changing of the tax code is a first critical step.
	A second necessary action to take to change the investment term from short term (quarterly) to long term (multi-year) would be a  sliding capital gains rate indexed to inflation which would  provide incentives to hold assets longer while protecting against erosion of money.  Indexing would eliminate unfairness to people who work for years to build a business only to reap little real profit when they sell it because of taxation on inflated assets.  The CPI would be the index used to adjust the purchase price of an asset upward before calculating the capital gain.   Former President Bush proposal to have a 23.8 %  rate for assets held one year, 19.6 % for 2 years and 15.4% for three years or more is a start.  But need much more drastic sliding scale is necessary.  High tax levels for short term (less than 3 months) (say as much as 75%) with a sliding scale down to virtually nothing (1-2%) for those items held over 10 years.  This would encourage long term interests.  By enacting such  a lower capital gains  tax, this would provide sufficient incentives and help finance  start-ups, new ventures  (see section IV).   By doing so this would change the tax structure and incentives to encourage a long term viewpoint.  Taxes must be redesigned to spur savings over consumption, to encourage productive investment  over speculation.
	If we can learn anything from the Japanese it ought to be the reasons for their success in business: an economy based on lower taxes, less regulation, less government sponsored R&D, and less government hostility towards successful companies.  Japanese style regulation is basically pro-business, pro-investment, and pro-export. To emulate its success, we should begin to emulate its foundations.


III. Problem--Social Security

Social Security was enacted in the 1930s and has been promoted ever since through misleading labeling and deceptive advertising, the level of which that a private enterprise which engaged in would have been taken to court by the FTC;  Payroll taxes are labeled ‘contributions.’  Trust funds actually exist of promises by one branch of government to pay back another branch.  The present value of the old age pensions already promised to persons covered by Social Security is in the many trillions of dollars, the trust fund that need be if it did exist.  A worker’s benefits are not financed by his contributions. Taxes collected from the currently working are used to pay benefits to persons who have retired, their dependents, or their survivors.  Persons now receiving payments get much more than the actuarial value of the taxes they they paid and that were paid on their behalf.  Those working are being promised much less than the actuarial value of the taxes they will pay and that will be paid on their behalf. It is a regressive tax, flat rate on wages to a minimum, bearing most heavily on persons with low incomes.  In 1950, seventeen persons were employed for every person receiving benefits, by 1970, only three, by early in the twenty-first century, only two. This is a transfer from the young to the old. Social Security is compulsory and impersonal where earlier efforts were voluntary and personal.  This therefore weakens the bonds of the family.  It is also a transfer from the less well-of to the better off. Poor tend to pay taxes for more years and receive benefits for fewer years than the rich.  Only one of every eight federal benefit dollars reaches Americans in poverty.  More than 60 percent of all federal benefits is spent on the 12 percent of Americans who are sixty-five or older.  Three times as much per capita as is spent on its youth.  Social security should be returned to a welfare program for the elderly.  Every elderly couple or person should be entitled to x amount of income per year.  Even more general than that; every person, elderly or not, should be entitled to a level of income adjusted for region.  If their level of income is not sufficient, a negative income tax will provide the difference (see Welfare section VIII,  its proper role).  Lets call it what it really is.   Welfare payments should be given for those below a certain income level while Social security benefits, beyond initial contributions, should be fully taxed.  
	What about privatizing social security, that is pensions?   IRAs, life insurance, disability insurance, health insurance, annuities perform the same function as social security, alas in a more effective manner.  Social security takes from the paychecks of the working and immediately gives to the elderly non-working.  There is no actual contribution to one’s account, merely paper notes and an obligation to rob one’s children when it is one’s turn to retire and collect (one estimate is combined employer and employee payroll tax rates would have to rise to above forty percent when the boomers retire, versus the fifteen percent today.)  Why can’t workers be allowed to choose among private sector alternatives instead of social security.  It amounts to a heavy restriction of the freedom of workers to  control their own income.  Portable pension plan tied to worker and not the job.  His IRA would travel with him no matter where he would go.  Immediately upon employment, 401 or pension payments would go into his self directed IRA.  If self employed or unemployed, contributions up to a certain limit would be permitted. 
	Chile has privatize social security.  The World Bank expects at least 30 countries to undertake pension reform over the next few years.  Under the Chilean system, 10 percent of every worker’s paycheck is deposited into an individual savings account managed by a private fund of the worker’s choosing.  After a decade, the Chilean savings rate approaches that of many Asian nations.  The government’s only role is to regulate the funds and to ensure a minimum pension in case that from the privatized fund falls below a subsistence level.  An additional benefit has been a vibrant capital market with a lack of dependence upon the volatile flows of foreign capital.  Mexico, Peru, Columbia, and Argentina have developed variations of the Chilean pension system.  The major drawback is the cost of marketing campaigns private companies use to attract depositors. 
	Our proposal for Social Security is as follows:
	1)	Repeal immediately the payroll tax. IRAs should be enlarged and made mandatory at 6%  of your salary to be matched by institute.  You can contribute up to 20%.  Self Employed can put in as much as 25%.  IRAs limited to savings, stocks, bonds, equities to  guarantee no funny business and to increase savings of country as a whole.   Used for institutions for American loans.  Portable. private pension plans:       those with non-working spouses can have an additional 5% withheld.  Rules approximate that of IRAs, not touch until age 59 without severe penalties.  Upon death will go into spouses or child's account or trust fund (tax-free).   
	2)	Continue to pay all existing beneficiaries the amounts entitled under current law.  However, benefits of current and future beneficiaries  will be taxed on any income received  beyond original contributions. Yearly increases in their welfare payments will be limited to one percentage point less than price index (after all, the people paying them are not guaranteed increases, why should the recipients be?  Why shouldn’t the social security recipients make a sacrifice too in making the system work again?)    This would transform it into a Social welfare program  as it should be and currently is.  
	3)	Offer choice to those in it:  continue or not.  If not, present value of payments made to be given in savings bonds not cashable until age 65. Those who opt out will receive special social security savings bonds for the value of their accrued monies plus interest.  These can not be cashed until age 65 and then on yearly basis based upon life expectancy tables.  In essence, the government will give every worker, benefits in form of annuity or government bonds for that amount equal to the present value of the benefits for which he would be entitled.
	4)	Terminate any further accumulation of benefits allowing individuals to provide for their own retirement as they wished. 
	5)	This would now create a mute point of retirement age.  However, those with insufficient benefits and who would have to receive supplemental (welfare) payments could not receive this level until age  68 by year 2000.
	It reduces that debt by ending promises to future beneficiaries.  The winding down of Social Security would eliminate its present effect of discouraging employment and would mean a larger national income currently, adding to personal savings, leads to higher rate of capital formation,and a more rapid rate of growth of income. It would stimulate the development and expansion of private pension plans and add to the security of many more workers.  funding gap to be made up from beneficiary taxes and small national sales tax. return to original concept as pension for elderly.  provide any additional funding for those necessary under welfare provisions. 
The result will be a
	•separate welfare and retirement system
	•private system.
	•no loss of benefits for those retired and already in system
	•confidence among youth for their pension system
	•mandatory savings to go into capital and money for America future.
	•lower interest, higher job creation
	•no pain because already paying such amounts.
In addition, steps must be taken to curb in spending on federal pensions.  In 1970, spending on federal pensions was $5.3 billion, by 1993 it had exceeded $65 billion with half of that total estimated due to the effect of overly generous COLAs.  Legal obligations for federal pensions alone exceed $1.8 trillion dollars.  Part of this program stems from ‘double dippers’ the ability of military personnel to be able to count years of military services towards both civil service and military pensions.   This needs to be stopped immediately.  Also COLAs should be limited to the same formula as proposed for social security recipients, that is 1 percentage point less than CPI index.


IV.  Problem--Welfare

You cannot build character and courage by taking away man’s initiative.

“If anyone will not work, neither let him eat.”  Apostle Paul

I have a right to food and shelter--anonymous welfare recipient

Continued dependence upon relief induces a spiritual and moral disintegration fundamentally destructive to the national fibre . . . Franklin Roosevelt

	Large scale government assistance dates back to Germany’s Bismarck introducing government financed social insurance in 1883. Under his plan, certain employees who became sick and could not work received medical care and cash benefits from a fund that both employers and employees paid into.  In 1889, a law was passed granting a pension to virtually all German workers at age seventy.  Inevitably, the trend of government assistance spread over Europe and eventually to the United States as a result of the great Depression in the 30s. During FDR’s first two years, over $2 billion was spent by the Federal Emergency Relief Administration trying to help the poor.  In 1935, FDR , declaring that ‘to dole out relief in this way is to administer a narcotic,’ replaced the federal cash dole for the able bodied with a massive program of public works jobs, the Works Progress Administration.  However, ADC (Aid for Dependent Children) was  exempted from that program.
	Current welfare policies  were perfectly rational and quite effective measures for the temporary relief of competent people who were employed due to the Great Depression.  Enacted in the mid-thirties, they were essentially complete by the end of the war. America’s early social workers compassion required both warm hearts an hard heads: worked only when local communities actively involved, stressed personal responsibility.  opposed government welfare programs, fearing correctly that its programs would crowd out and diminish private charity.   They were very successful private efforts.  These programs helped maintain stable poor communities where vast majority of adults acted responsibility and gradually bettered themselves.  The early social workers had no qualms about making moral demands of those they helped; they encouraged  family, work, freedom, and faith.  No one was allowed to eat and run.  But  the bureaucracy had been built.  They had to find new clients, which they did in the massive movement of Afro-Americans and white Appalachians into the Eastern urban areas.  In 1937 only 3.5% percent of ADC children were illegitimate; by 1960, 64 percent of ADC families had that designation; by 1971 the percentage was nearly ninety percent.   Between 1960 and 1974, ADC rolls more than tripled to almost 11 million from 3.1 million.
	Since 1965, the U.S. has spent over $5 trillion dollars on welfare, which adjusted for inflation is more than was spent on WWII with less than nothing to show for it. If we had fought WWII like we have fought Welfare, we’d all be speaking German and eating sushi. In 1968, thirteen percent of Americans could be classified poor; in 1980 after quadrupling social welfare expenditures, the percentage was still 13 percent.  Welfare must mean obligations as well as rights.   Federal payments and subsidies to the non-poor amounted to $651 billion in fiscal year 1990, five times what was paid to the poor. Let’s face it, the government has lost the war to end poverty, at least the way they are currently fighting it. 
	The Heritage Foundation counts at least 79 federal welfare programs for the poor not counting social security, Medicare, state or local programs, well over 100 programs in total; Program duplicates occur regularly;  but every program requires a bureaucracy to administer it.  In fiscal 1992, welfare costs $305 billion.  The cost grows by 10 percent a year. Welfare rolls have increased from 2 million families in 1970 to 4 million in 1990 and are projected to increase to 6 million families by 2000. Eleven million people are on welfare, Aid to Families with Dependent Children, a budget of over $20 billion at the federal level alone. Since 1960, the percentage of children living in single parent homes has soared from 9 percent to 27 percent.  The number of children living in poverty has nearly doubled to 22 percent. Welfare mothers are becoming younger, those age 24 and younger increased from 22 percent to over 31 percent between 1979 and 1993. Over 55 percent of children on welfare live with a mother who has never been married. In essence, the antipoverty programs have stifled self-reliance among the poor. The War against Poverty is being won: by Poverty.  The more we fight the war, the more we spend, the more, it appears, poverty survives.
	If we took everything spend on means tested welfare and divided between all poor families, it would amount to more than $25,000 a year for every family of four. Yet little of that money actually reaches those in most need; In no state does maximum AFDC benefit raise a family of any size above the poverty line. AFDC spending has actually decreased from 1.5 percent of federal budget in 1975 to less than 1 percent today. Benefits adjusted for inflation including Medicaid, food stamps and AFDS are down 3 % from 1975 to 1992. Expenditures on poverty are such that if cash payments were made directly to those on the dole, they would receive almost double the current poverty level.  It is being siphoned off by administrative expenditures, supporting a massive bureaucracy at attractive pay scales. Many would like to work but the system provides incentives to stay on welfare and not to work:  as many as 20 percent of welfare recipients stay on AFDC just to keep the accompanying Medicaid  benefits for their children.   Once on welfare, it is very difficult to get off.  Little incentive exists to earn income and get off the dole and makes it virtually impossible to start a business.  If a person accrues liquid assets exceeding $1000, he or she is kicked off of public aid.  If one goes off welfare, not only lose benefits but medical benefits, often more important. Welfare’s Achilles heel: those earning marginal incomes (between 13,000 and 20,000 dollars) must give up half of income taxes and benefits for each dollar they earn.  If other welfare benefits (Medicaid) are included, the marginal rate effectively exceeds 100 percent.
	Welfare wastes tax dollars on a system that does little more than maintain families at subsistence levels.  Many employers find that they must train entry-level workers before acquiring even the rudimentary skills of the workplace.   Welfare contributes to crime and illegitimacy, a sinkhole for young women.  Welfare is a direct result of couples not marrying, of fathers failing to support their offspring, of the system promoting these results through their payment provisions.   Welfare does not promote development.   Massive economic and social mistake that assumes poor people have no talent and no capacity for vision.  The major flaw of the modern welfare state is not that it is extravagant with money but it is stingy with the help that only a person can give: love, time, care and hope.  The impersonal government dole does nothing to cure the poverty of the soul that keeps so many mired in self destructive behavior. 
	The traditional welfare delivery system needs a radical overhaul.  The focus of the current welfare system is to see what benefits the clients are eligible for and to make sure that the right amount of money gets to the right people with the fewest errors.  The focus should be to see the clients become self-sufficient.   The federal government actually provides rewards for the system to keep clients on the dole: by reimbursing almost all administrative costs incurred by local offices while imposing no meaningful performance requirements; that is, the more you spend the more you get without regard for results.  The delivery system must be reformed so as to provide incentives to get people off the welfare system, not how many people they keep in it.  Government could reward welfare offices for every customer who obtains a GED, or for every teenage mother who attends school regularly, or for every teenage girl who keeps from being a mother, or for every mother whose kids attend school regularly.  In fact, like all monopolies, competition would improve productivity.  Who says the government must run the delivery system as well as the welfare system. 
	Welfare usually focus on how it drives families apart and penalties the working poor. 	Social workers in urban areas often cause the very misery they work so hard to relieve; they actually cause dependence, treating their clients as relief cases and preventing them from attempting to get back on their own feet. Social workers routinely spend 70 to 80 percent of their time filing out papers; no more than an hour or an hour and a half of their day is available for their clients, the poor.  Hundreds of federal aid programs are on the books, financed by  hundreds more separate appropriations and administered by dozens of federal departments and agencies aided by hundreds of Washington bureaus and regional offices. 
   	Modern bureaucracy is inflexible and unresponsive, presenting welfare recipients with all-or-nothing proposition.  The system discourages saving and creating wealth.  AFDC discourages family stability because women cannot collect if a man lives in the house.  Discourages people from working because if a welfare mother takes a low wage job without medical coverage or child care subsidy, it lowers her family’s standard of living.   The solution is a safety net that also operates as a ladder,  to help them get out of poverty, out of dependency, but a little at a time without risking their lifestyle.  Job clubs, career assessment and counseling, remedial and vocational education, job training, supported work, direct job placement efforts, on the job training.  It must not be makework or dead end jobs.  If recipients refused to participate or failed to follow through, they would receive lower grants.  A commitment to self sufficiency must be made.  motivated clients desired. The goal of welfare should be to help people out of these dire but temporary problems, not to treat temporary problems as if they were permanent ones and thus make them so.  A sensible program would be relatively easy on applicants in emergencies but hard on clients who wish to stay on the dole for any long period of time.   A system should be supplemented with child allowances given to every family for each child. 
	The only dependable route from poverty is work, family and faith.  The first principle is that in order to move up, the poor must not only work, they must work harder than the classes above them.  Every previous generation of the lower class has made such efforts.  But the current poor, white even more than black, are refusing to work hard.  A study from the Institute for Research on Poverty at the University of Wisconsin showed that the current poor work substantially less, for fewer hours and weeks a year, and earn less in proportion to their age, education and other credentials than either their predecessors or those above them on the income scale.  The study indicates clearly that welfare and other subsidy programs substantially reduce work; the poor choose leisure not because of moral weakness but because they are economically rationale, they are paid to do so, it makes more sense for them to do so.  When such a transfer program breaks the psychological link between effort and reward, which is crucial for upward mobility, it can not be considered a success.   Workers must understand that what they are given depends on what they give.  Nothing is more deadly to achievement that the belief that effort will not be reward, that the world is a bleak and discriminatory lace in which only the predatory and specially preferred can get ahead.  Such a view in the home discourages work effort in school.
	The second principle of upward mobility is the maintenance of monogamous marriage and family.  It is the culture of poverty that condemns many to constant dependence on the welfare state.   The argument is that if only black children had better schools, more role models and good jobs, blighted urban neighborhoods would bloom.   The local underclass will continue.  The welfare mindset has so isolated the people from the world of work, they don’t know how to go about finding jobs.  The culture of poverty, the pattern of dependence, irresponsibility, antisocial behavior  has its roots in the perverse incentives of the welfare system.  It is the absence of responsible parents, especially fathers, is the phenomenon at the heart of the underclass poverty.  
	The Wisconsin study showed that married men work between two and one third and four times harder than married women, and more than twice as hard as female family heads.   Husbands work fifty percent harder than bachelors.  the effect of marriage is to double the work effort of men.  Maintenance of families allows the family to more likely move upscale than otherwise, thus a key factor in reducing poverty.  Once a family is headed by a woman, the family responsibilities and distractions tend to prevent her from the commitments needed to make full use of earning potential.  A married man channels his male aggressiveness into performance as a provider for wife and children.  Thus, it is necessary to strengthen the male role in poor families. 
	The lower class typically lives from day to day, from hand to mouth, and are thus unable to plan or save or keep a job.  All time is present, which does not allow accumulation towards wealth.  This lower class characteristic is largely that of single, divorced and separated men.  Their congregation in ghettos, the dominance of single and separated men in poor communities,  magnifies their impact on their communities.  The short sighted outlook of poverty stems largely from the breakdown of family responsibilities among fathers.  Married men with families tend to have the longer outlooks desperately needed to move up the income chain and to break the routine of poverty. In the welfare culture, money becomes not something earned by men through hard work, but a right conferred on women by the state.  Marriages dissolve because benefit levels destroy the father’s key role and authority; he is no longer king in his own home.  Nothing is so destructive as the recognition that his wife and children can do better without him. 
	Mothers nor the social workers and reformers cannot lift their families out of poverty.  Making the mothers work confers few social benefits.  Only the men can usually fight poverty by working, and the antipoverty programs tend to make the father’s situation worse, they tend to reduce his need to pursue the longer horizons of career.   Our welfare system creates moral hazards because the benefits have risen to a level higher than the returns of a unbroken home and a normal job.  Few lower income men could support their children at the levels of decency or adequacy specified by the U.S. government in its low income budget.   To live well and escape  poverty, they will have to keep their families together at all costs and to work harder than those above them.  
	The third parameter is faith, faith in the future, faith in the rising returns of giving,  faith in the providence of God, faith in the benefits of trade, faith in capitalism.  All are necessary to sustain the spirit of work and enterprise.  One has to have confidence in a higher morality, to gain resolve against setbacks and frustrations, to encourage the forgoing of present in the name of the future, to work beyond the requirements of the job.  During the Great Depression, under the auspices of ‘Father Divine’ American blacks launched hundreds of successful businesses in America’s inner cities.  Black churches used to be the centerpiece of the black community.  This needs to be done again.
	Any welfare system will eventually extend and perpetuate poverty if its benefits exceed prevailing wages and productivity levels in poor communities.  As long as welfare is preferable (as a combination of money, leisure and services) to what can be earned by a male provider, the system will tend to deter work and undermine families.  Welfare, exerts a constant seductive erosive pressure on the marriages and work habits of the poor and eventually the poor communities.  It does foster a welfare culture.  By making optional the male provider, welfare weakens the prime mover in upward mobility.  The welfare culture tells the man he is not a necessary part of the family, he feels dispensable.  As a result, the men tend to leave.  The wages of common labor are far below the benefits of AFDC, Medicaid, food stamps, public housing, public defenders, all the goods and services of the Welfare state.  As long as this situation persists, real family poverty will tend to get worst.  
	Our recommendations on the Welfare system are to   reform it by replacing the specific programs with a single comprehensive program of income supplements in cash--a negative income tax linked to the positive income tax.  The savings alone from bureaucracy should be substantial.   It would provide an assure minimum to all persons in need regardless of the reasons for their need while doing as little harm as possible to their character, their independence, or their incentive to better their own condition.  With a negative income tax, you would receive from the government some fraction of the unused allowances.  If your income was below allowances, you would receive a subsidy, the amount depending on rates.  It would allow for fluctuating incomes.  Its main purpose is rather to provide a straightforward means of assuring every family a minimum amount, while at the same time avoiding a massive bureaucracy, preserving a considerable measure of individual responsibility, and retaining the incentive for individuals to work and earn enough to pay taxes instead of receiving a subsidy. It would replace all the other programs.  It provides cash, it is general and not specific.  It gives help because the recipient is low income, without regard for age, sex, marital status, or race.  It makes explicit the cost borne by taxpayers.  It would also dispense with the vast bureaucracy.  It would eliminate the present demoralizing system under which some people--the bureaucrats running the program run other people’s lives.  Welfare benefits must be allowed to decline steadily in value as inflation acts.  The Medicaid program, must be amended to require modest payments in all but catastrophic cases.  Rents must be paid directly to landlords.  Encouragement must be given to buy into a home.
	Without a plan to foster upward mobility and promote jobs and economic growth in our inner cities, we will continue what we have now: a permanent underclass dependent upon the government.  One solution is to reintroduce entrepreneurial capitalism into our inner cities. Our goal should be to restore the link between effort and reward-between individual acts and individual responsibility.  One possibility is to establish enterprise zones with no capital gains tax on investment and no income or payroll tax up to 200 percent of the poverty line for anyone who takes a job and tries to work out of poverty.  Government owned public housing should be privatized to provide for home ownership and to instill responsibility.  The law that prohibits welfare recipients from saving should be abolished. 



Recommendations
	We inscribe  to the beliefs:
	•that people are better off working than depending on government resources.  We should make welfare a short term safety net as it was originally intended.  We should require healthy adults to work but offer job linked training.  They should strive for permanent private sector jobs not make work government jobs.    
	•must agree to education, job training and placement within one year or face sanctions.
	• let states run welfare within federal guidelines.
	•no added benefits for children conceived while receiving welfare benefits.
	•emergence of a new social contract--that people who accept welfare benefits owe the government a good faith attempt to get a job.
	•Illegal aliens should be deemed ineligible for most federal welfare benefits.
	•child care and health benefits must be provided during the intermediate phase between welfare and work; 90 percent of all adults on welfare are mothers. Phase out benefits gradually as pay increases.
	• Any woman or girl above the age of 10 on welfare or being provided governmental assistance programs must be put immediately on birth control.  
	•Eighty percent of all welfare supported children have an absent father, of which only 15 percent receive child support payments.  In order to receive welfare payments or ADC for children, name fathers at birth, a father must be listed.  Their responsibilities must be noted. Child support must be enforced. We should change tax, support, and welfare laws to encourage marriage, establish paternity at birth. 
	•We should examine programs offered in the non-profit sector. New Hope project in Milwaukee provides wage subsidy, child care and health benefits but only for those who are working.  Participants must look for private sector jobs.   Denver’s Family Opportunity Partnership shows promise of targeted training.  Program works closely with a local temporary agency and teaches word processing, computer programming and receptionist skills.  Michigan has handed over its homeless programs to the Salvation army.  Perhaps contracting out these programs to such non-profit programs would be more effective, provide more caring (‘tough love’) to the recipients, as well as getting the government out of the actual doer mode.


V. Problem--  Minimum Wage and Labor

Proponents of minimum wage properly deplore extremely low rates; by outlawing wage rates below some specified level, they hope to reduce poverty. In fact, they increase poverty.  The state can legislate a minimum wage but it can hardly require employers to hire at that minimum all who were formerly employed at wages below the minimum.   The effect is to make unemployment higher than it otherwise would be.  The people who are rendered unemployed at the margin are precisely those who can least  afford to give up the income they had been receiving, small as it may be Minimum wage is favored by labor organizations.  Favor every higher minimum wage as a way to protect the members of their unions from competition and to demand higher wages as the premium over the minimum they deserve for the talents and skills they offer.   Discriminate against persons with lower skills.  Why a young person is better unemployed from a job that pays minimum than employed at a job that pays sub-minimum. The high level of unemployment of low skilled minorities is largely a result of minimum wage laws. 
	Minimum wages represent an interference with markets which results in much harm.  Their obvious effect is to price workers out of jobs; this effect has been documented in hundreds of studies.  Those most likely to suffer are the just the type of people the proponents of minimum wages say they most want to help.  They include those on the fringes of the labor market or on the borderline with marginally usable skills, the racially disadvantaged, inner city youths, etc., those who face a choice between low pay and now pay.  Minimum wages are a denial of the human right to sell one’s labor to a willing buyer and to make one’s own decision about whether or not to take paid work at going rates.  They are also an extremely inefficient way of helping the poor.
	Labor policies should be even handed between labor unions and management.   Minimum wage should be abolished.  In essence, the following are our recommendations:
•	Repeal the Davis-Bacon act which for all practical purposes requires highest paid union help on federal projects; this will cut costs drastically.
•	Do not legislate ‘bans’ on management’s rights to replace striking workers.
•	NLRB must be cleaned up, it is too pro labor and not objective enough.
•	Laws on labor violence must be tightened and enforced.
•	No unemployment compensation for striking workers.
•	Child labor laws should be reviewed so no workers under age 14, only 10 hours week from 14 to 16, 20 hours week during school sessions for those under 18; and no work at all under age 18 unless enrolled in school.
Department of Housing and Urban Development since its creation in 1965 has grown to tends of thousands of employees and tens of billions of dollars each year.   Housing units constructed for low income families have frequently become slums and hotbeds of crime.  Some even had to be destroyed because they had deteriorated so badly.   Building and owning their own homes would give participants in a housing development a sense of pride that would lead them to maintain them properly. Chicago has for several years been implementing a policy whereas a limited number of families are moved out of the high rise ‘projects’ and scattered to the city.  This need be implemented throughout.  their housing is still subsidized, homeowning should be as well.  all projects should be demolished. 
	Habitat for Humanity is another outstanding program that should be expanded as a means of providing housing for lower class workers.  Workers are able to buy their own house for a fraction of the market but must live in it and must contribute a significant number of hours towards building their own home.  Thus generations commitment and resolution towards maintaining the home.


VI. Problem- Infrastructure
	In 1992, total governmental spending on infrastructure was approximately $77 billion or 1.29 percent of GDP, down half a point from 1964 peak.   Some say productivity growth would have been 50% higher if infrastructure investment had not fallen off during the 70s and 80s.  Germany’s annual rate of public investment averaged 3.7 percent during the 80s while Japan’s was an incredible 5.7 percent.   In an examination of Investment versus productivity,   the best performer was Japan, whose ratio of public investment to GNP was twenty times greater than that of the U.S. and whose productivity grew almost six times faster than ours during the timeframe 1973-1985.  The next best performer was West Germany, raising its productivity more than four times as rapidly as the US and investing about 10 times as large a share of GNP into public capital.  France, Italy, United Kingdom, Canada all show the same relationships as improving their productivity performance versus the US and exceeding ratio of public investment to GNP.  growth promoting consequences of public investment.  By breaking federal budget into separate accounts which track consumption (normal expenses of government),  versus capital (highways, buildings), we would be able to tell more.
	A relationship over time exists between the productivity of private capital and the stock of public capital.  Good highways enable goods to be delivered faster, with less wear and tear and trucks and lower labor costs per units delivered.  Trucking companies, as well, earn a better rate of return and are more likely to invest.  Congested highways cost money in productivity wasted, time spent.  States with more public capital, all else equal, had greater levels of private output; and public-capital investment stimulates private investment and creates jobs. If we are going to do it, we should eliminate the Davis-Bacon act which requires union funding of federal contracts.  We should determine the most critical projects and  bid them out.
	Costs of infrastructure rebuilding range from $45 to $125 billion a year to repair twenty years of neglect to our infrastructure.  This is necessary but not sufficient.  Bullet trains linking major cities, commuter lines for metropolitan areas, modernization of our air traffic control system ( hopelessly out of date as needed to handle the volume of air travel expected during the decades to come).  Then we would have a world class infrastructure.
	 Regions can attract and maintain high-tech firms by improving local infrastructure--utilities, roads, schools, and other public facilities.  Boosting funding levels at state supported universities enhances high tech image and attractiveness of a region.  Specialization can also occur as a means of competition; the University of Cincinnati concentrates on manufacturing technology, Ohio State University on welding research and University of Akron on polymers. Access to other areas is another requirement.  Professional workers depend on face-to-face communications with people inside and outside their own firms.  This increasingly means good air service, even to the extent of becoming an hub.   The quality of life is the third infrastructure requirement.  Art and cultural activities add to the quality of life index. High tech industry is attracted to major airports with good national and international  passenger and air cargo activities. High technology  industry are attracted to areas with a high degree of internal accessibility and connectivity,  areas with well-developed highway systems. High tech industries are attracted to regions which are weakly unionized, and have low wage rates and high unemployment rates. High technology  industries are drawn to areas with a well-established infrastructure of specialized business services
	One potential recommendation is to raise the gas tax by 10 cents a year each year for a decade.  This dollar a gallon may look high but compared to other countries’ rates it is low ( $3.64 gas taxes per gallon in Italy, $1.68 in Japan,  81  cents in Canada versus a measly 38 cents per gallon for U.S., even at 1.38 it would be a bargain.).  Every penny increase means $1 billion annually.  The effect of this would be to reduce gas consumption and auto emissions, as well as  encourage alternatives to automobile transportation. Eventually after a decade we would have $100 billion per year to invest in repairing, maintaining, and building new infrastructure. Proceeds would be used to  repair the infrastructure (70%), to build new roads as needed ( 10%) and to encourage mass transit rail links between major metropolitan areas (20%).    			Another good idea we espouse  to have an import floor of oil at $25 per barrel.  For any oil imported at less than that price, tax on difference.  This would provide incentives for domestic energy to pursue oil and to pursue alternative sources.  In the beginning, floor should be set at $20 per barrel or just slightly above current price with annual increments of $1 until reaches benchmark level.  This predictability of price would have provide stability in the market. 
VII.  Problem--Technology

Where there is the necessary technical skill to move mountains, there is no need for the faith that moves mountains.
— Eric Hoffer

The economic and technological triumphs of the past few years have not solved as many problems as we thought they would, and, in fact, have brought us new problems we did not foresee.
— Henry Ford II

Today’s technology is yesterday’s magic

Life and society are encountering rapidly changing conditions.  The technology is also pushing on the social aspects of life.  Ecology for example is getting to be critical we can not sit around and wait for long term planning some things need to be done more quickly so that the technology, transportation, communications, and all of these that are creating a system where a government has to preface a little more responsive is a better intoned the problems develop more  quickly and are more critical and more difficult resolve if you wait to long to try and resolve them.   For a more responsive government and higher quality service, should use the technology available today, especially the interactive capabilities.
	The National Academy of Engineering has called for a state-level technology extension program to help modernize management practices in America’s small and midsized manufacturing firms, aiming to reach 20 to 25 percent of all such companies by the year 2000.  This would be a technological equivalent of the highly successful U.S. Department of Agriculture county extensions which revolutionized American agriculture between 1850 and 1950. 
	Both JETRO and the Japanese Sogo Shosha provided a necessary technological transfer mechanism during the fifties and sixties when Japan was climbing up the technology latter.  An American equivalent to search out and adapt the best foreign developed technologies, provide licensing arrangements for American firms and investment credits to utilize the technology, would be an interesting and badly needed program. 


VIII. Economic policy-- recommendations

Director’s Law:  public expenditures are made for the primary benefit of  the middle class and financed with taxes which are borne in considerable part by the poor and rich.

When economic power is centralized as an instrument of political power, it creates a degree of dependence scarcely distinguishable from slavery--Fredric Hayek

“kinder, gentler societies have high rates of unemployment.”

	1)	The government should  divide its budget  into three parts: past, present, and future.  The past would include interest payments on the national debt and other obligations (pensions, bailouts, etc.);  the present would include current operations;  the future budget would include capital spending on infrastructure and research. The government should be able to borrow to improve the economic infrastructure and hence create wealth (Just as businesses in the private sector borrow to modernize and expand their operations, not limiting themselves strictly to cash flow).  The capital budget should be able to be expanded or contracted as the economy and needs dictate. There is basically nothing wrong with using debt, if it is done wisely, especially if it is used in times of trouble (wars, depressions) or for capital improvements. To make it especially tough to live beyond one’s means, we suggest a 3/4 approval  by both houses of Congress in order to pass deficit budgets.
	2)	Eliminate full deductibility of corporate interest payments since this provides incentives for borrowing over issuing stock, thus discouraging its heavy usage and taxpayers’ indirect subsidies for takeovers.   Dividends are taxed twice, once as corporate profits and again as investor income.  Dividends should be considered deductible while interest payments not, to provide incentives towards equity and against borrowing.  Dividends should be allowed to be deducted as a pretax expense with interest an after tax to switch incentives towards equity and away from borrowing.  This would increase the cash flow available to invest in new plant and equipment and reduce the tax code’s bias against equity financing and away from debt. By doing so, this should encourage capital ownership and capital retention.   Policy should be to encourage stock ownership instead of loans.  
	3)	Sell off excess or marginal federal installations and land or give these facilities and land to local agencies for future considerations or trade.  Leases on federal lands should reflect market values.  Provide private managers for such services as managing park lands.  Sell off National Forests to private interests with strict caveats on uses.  Use funds for greenbelts in urban areas. Review government property.  Sell off/lease surplus property and land.  Use proceeds to buy parks, forests, wilderness areas for metro areas, endow museums and cultural exhibits. 
	4)	Tax on gas, diesel, fuels increased by  5 cents per year for each year for next two decades (resulting in 100  cents per gallon new taxes.  Since costs in most European countries exceed $2 per gallon, even at that tax rate, American consumers are getting a good deal.  We suggest an economic study to find the optimum level of gas price to provide maximum revenues).  These proceeds are to be distributed as follows:  50% federal, 25% state, 25% local.  The majority  (70%) of these new moneys to be spent on repairing, replacing, maintaining current infrastructure.  The rest of money would be spent on new infrastructure, highways, especially high speed rail links between major metro areas.
	5)	Deposit insurance should be limited to a maximum amount per social security number ($25,000).  An absolute prohibition on repayments from the insurance fund of any sum above the limit to any creditor of the bank.  Private ratings services will rate the banks on their soundness.  Payment into the federal system of insurance will be based upon level of riskiness, not as now, on a flat sum without regard to risk. 	
	6)	Provide tax incentives for exports. Japanese monetary and fiscal policies consistently provide tax advantages to exporters.  Germany’s export miracle has not been led by its large companies but rather but by its many mid-sized companies.  Additional Department of Commerce and State efforts to  assist mid-sized and small companies in the export of their products must be made (to be honest considerable effort along these lines has already taken place; many embassies abroad have turned into a businessperson’s best ally but much more can be and should be done).  One estimate has concluded that if all the small businesses in the U.S. increase exporting by only 5-10% of their current revenues, the entire trade deficit will disappear.  The products are there.  Many small businesses do quite well.  It is only the fear of the unknown-- exporting and foreign markets-- that must be countered.  An estimated $40 billion a year of exports could appear if obsoleted export restrictions are removed (as Department of Commerce Secretary Brown has encouraged be done).
	7)	Create substantially higher tax incentives to American R&D in high risk technology;  not a flat tax credit like the old investment tax but a graduated curve, for the higher percentage of revenues, the greater the credit. Also the greater the increase in investment and R&D from year-to-year, the greater the credit would be.  The credit would also be applicable to any spending on the manufacturing floor particularly concerning productivity and quality enhancement.
	8)	Provide accelerated depreciation so as to allow faster writeoffs of capital equipment.
	9)	Encourage savings by not taxing interest, by establishing retirement IRAs. Currently IRAs are  only deductible for low to middle income workers.  IRAs should be expanded in both dollar volume and scope (up to 10% of one’s income until $100,000 with a 10,000 per year per family member limit).  Expand the use and availability of 401-Ks.  Eventually social security should be made optional and the moneys paid into social security should be paid directly into a tax deductible retirement account.
	10)	Encourage wealth formation activities and not financial shuffling.  Eliminate such activities as greenmail and golden parachutes. Any stock repurchase must be made available to all stockholders not specific ones; stock options should become usable only after five  years.  Executive compensation  limits not specifically tied to company performance should be heavily taxed. 
 	11)	Revise anti-trust laws to allow shared manufacturing and shared R&D between competitors.  Webb-Pomerene Associations, Sematech, MCC, are a few examples of anti-trust exemptions being established.
	12)	 Pension funds and mutual funds are currently prohibited from owning more than  10 percent of any enterprise and prohibited  from having real ownership positions nor exercising control such as sitting on the boards of directors and get inside information.  These regulations need to be repealed.  Banks and other financial institutions should be able to  own stock in enterprises up to a certain limit (10%). By providing equity ownership, banks will have more clout, more intimate relationships with their accounts, and a more long term prospectus.  Proxy rules should be rewritten to allow shareholders to talk more freely among themselves, at much less cost and paperwork than currently exists.  
	13)	Make in America (or in any NAFTA associated country) all defense and national security items.  If this item is currently not being made in a NAFTA country,  then it must be licensed to an American firm or the foreign company must build plant in U.S. and produce  a significant portion (80% value added) in the United States or any associated NAFTA country.
	14)  	For any equipment funded in part or in total with Federal dollars (it would be worthy to expand to state and local level and funds as well), pursue a “Buy American policy”  that is, purchase from an American owned or American located firm which in writing promise at least 80% American  (NAFTA) value added portion for that purchase.
	15)  Reorient National Priorities.  America is already the most housed country in the world.  Additional housing incentives are not necessary.  Rather, efforts should be put into investment and capital expenses.  Not the consumer side but the investment side.
	16)  The United States should retain the  first-to-invent  policy for patents and resist international pressures to change to a first-to-file system.  The paperwork and costs involved in patents and copyrights must be reviewed so as to make it easier for the small guy to patent his ideas and venture capital to market them.  
	17)	One simple accounting change could make a world of difference: in the US R&D is expensed, therefore, cutting R&D leads to higher bottom line profits immediately.  In Japan, R&D is capitalized, there is no such immediate effect.  This is a policy that should be emulated to provide sufficient long term incentives.
	18)  Dying Industries should not  be subsidized.  Textiles, various non-competitive agricultural crops such as sugar cane, peanuts, tobacco and pineapples should not be subsidized.  Rather subsidies, if any, and easily available, large doses of financial and business help should be provide to high tech, growth industries, and value added functions.  Retraining programs and generous relocation allowances should be used to minimize restructuring costs.   Emphasis should be put on global leading industries rather than protecting mature industries.
	19)  NAFTA should be extended as quickly as possible throughout the Caribbean and Central America and to the entire Western Hemisphere.  NAFTA offers tremendous benefits not just for the United States but for all the countries associated with it.  It is truly a win-win situation.
	20)  Government policies from payroll taxes to generous unemployment benefits discourage employers from hiring and jobless workers from taking jobs.  Northwestern economist Dale Mortensen estimated that permitting the unemployed in the U.S. to collect jobless benefits for three months instead of the current six would shave 1 1/4 percentage points off the unemployment rate.  
	21) No grants. . . loans. . . low interest loans perhaps but loans.  In some cases, loans should be tied to future earnings and a percentage of future earnings for a certain number of years should be returned to the government.
	22) Eliminate price controls on all items as well as government subsidies. Price controls by holding prices below free market levels often create shortages. Gas shortages during the late 1970s, rent controls have demolished housing in cities such as New York City.  Price controls also change the relationship between buyer and seller. the seller no longer needs any individual buyer and views the buyer as a chiseler seeking value without payment.  The buyer tends to view the seller as an tyrant whom he must beg for favors or threaten with reprisals.  
	23)  Add $1.00 per pack for cigarettes and cigars and tobacco products.  Add $1.00 per beer can/bottle and $1.00 per wine container and $5.00 per alcohol fifth.  These taxes would go into a specific fund for tobacco and alcohol related dysfunctions, health problems, and victims of users of these products.
	24)  Abolish the estate tax.  This is a confiscatory tax, plain and simple.  Most middle class worries about this, especially when life insurance proceeds and house assets are included.  Small businesses are especially hurt by this, oftentimes requiring the business to be sold off to pay for the tax. If one is worried about rich transferring money to rich, the threshold should be raised not just to $ 1 million but to $20 million.  This number should be indexed for inflation annually.   This number is high enough to ensure small businesses will not be hit hard.  The current tax brings in only a few billion and to keep a clearly confiscatory tax simply for revenue purposes can not be justified.
	We want to certainly have fiscal policy that reflects an accurate economic position.  We, the public, can not afford to go into tremendous debt on a personal level, why should we allow our government to do so then!  It is considered obviously ineffective and inefficient and the government should operate some and not completely the same but no government can exist that can continuously run into a deficit budget.  You can have all explanations on it but the fact that it pushes the economy.  In a period of prosperity we should not be in a deficit budget and not to the extent as much as 25% of our total budget is based on serving a national debt.  25% is much to far because that leaves us only with 75% to cover the rest of the budget.  Which in itself tends to increase a deficit even more because we need to replace that 25% which we can’t spend by borrowing that and this can go on for ever. So certainly one of our goals is a fiscal policy that is good.
	In essence, our beliefs are in unbridled Capitalism:   a right to fail as well as succeed should exist.  Equal opportunity not equal results.  Reward  (and by doing so stimulate) investment and capital creation. 




IX.  Recommendations--Privatizing services

The renewed enthusiasm for private enterprise when combined with an  imperative to limit government spending yields privatization, the practice of delegating public duties to private organizations. 
	We need a vigorous, strong, active government.  But we face a choice between big and impotent government and a government that is strong because it confines itself to decision and direction and leaves the doing to others.  Privatization (or actually reprivatization since many of these  functions we are proposing be privatized were actually performed by the private sector for hundreds if not thousands of years before big government and the welfare state came around and took over their function--performed quite well we should add) will restore strength and performance to government. We need a government that governs, not one that does. The purpose of government is to govern.  This is often incompatible to doing.  Any attempts to combine governing with doing on a large scale paralyzes the decision making capacity.  Any doing that is done is often poor.  This is the basis for decentralization.  The purpose of decentralization is to make it possible for top management to concentrate on decision making and direction by delegating off the doing to operating managements, each with its own mission and goals, and with its own sphere of action and autonomy.  This does not necessarily mean delegating to local rather than federal government those programs.  It is a systematic policy of using nongovernmental institutions for the actual doing, for performance, operations, execution.  
	Services most commonly provided publicly are defense, safety, transportation, parks, recreation, health, and education.  These public goods are differentiated by externalities, benefits accruing to those external to the immediate beneficiary group.  If nonpayers or free riders cannot be excluded from enjoying certain services, these services are logical candidates to be publicly provided at the expense of all taxpayers. The typical assumption by the public sector is that the private service producer has no interest in the public’s concern for services.  The private producer of services just does the job and nothing more.  The expectation is that there should be something more. 
	Government should ask “How do these institutions work and what can they do?” It would then ask “How can political and social objectives be formulated and organized in such a manner as to become opportunities for performance for these institutions?” and “And what opportunities for accomplishment  of political objectives do the abilities and capacities of these institutions offer to government?” Under this policy, government would become the central social institution and the other entities the doers.  In essence, the government would be the conductor of the orchestra.  The conductor does not have to play all the instruments, he may not even play an instrument.  His job is to know the capacity of each instrument and to evoke optimal performance from each.  Instead of doing, he leads.  Government would become increasingly, the decision maker, the vision maker, the political organ.   Whether it be a private entity,  a nonprofit, a cooperative or a government, it must be independent of government and autonomous. The advantage of a privately owned institution is that, even from the beginning, it is adaptable to change, has to prove its right to survive time and again, and if it does not successfully adapt, it will cease to exist, unlike other institutions, particularly governmental agencies.  Privatization is the rage.  Argentina, Mexico, Chile and Venezuela are all selling or have all sold the majority shares of their national telephone company.  Throughout Africa and Europe, denationalization (privatization) is occurring. 	
	By mid 1987, over 28,000 recorded instances of public services being provided by private firms under contract to local government. Private businesses working for local governments carry out over one hundred functions, virtually every function.  These include providing legal counsel to the indigent, local prosecution, private mental hospitals, private toll roads, fire protection, air traffic control towers.    On the average, city governments can cut in half the cost of city services by contracting with private firms.  The reasons are private ownership allows the concentration of interest in efficiency, private management has fewer layers, rules, procedures; public organizations are secure against competition while private organizations are not; and private firms that fail to deliver face bankruptcy. 
 	In one study of garbage collection, of twenty-nine private competitive firms, all but one charged less per household to remove the garbage than did the public works ($127 per year for the county versus an average of $87 for the private firms).  On average it costs the General Services Administration $1.18 per square foot to keep a building clean for a year versus .73 for contracting it out and private landlords could do it for only .63 per square foot. The GSA paid wages 60 percent above that which private firms paid for comparable work.  Public workers--less well equipped, following less efficient procedures--accomplished less, on average, per hour of effort.  Privately owned and operated systems were measurably more efficient: they transported more passengers per dollar spent, collected more revenue, were safer, and required far less in federal subsidies. 
	Studies of private versus public systems, be it bus systems, fire protection, garbage collection, have all shown that whatever activity government engages in tends to cost roughly twice as much as the same activity carried out by private entities. One example can be found in Phoenix.  Phoenix privatized price trash and garbage services.  They actually contracted it out to a private firm and they found out that it was more efficient and less costly. Then they made their own city system bid on the service, not awarding it any contracts until it could provide the service just as efficiently and cheaply as the private sector was doing. Phoenix is not an isolated example. As many as 36 percent of local governments hire private contracts to collect garbage and repair streets, some even contract out the management of prisons.  A Touche Ross and Company survey on privatization indicated that what public managers wanted primarily was lower costs.  The chief motives for considering contracting out were citizen demands for services and objections to taxes, along with curtailment of federal revenue sharing.  
	Advantages and benefits of privatization include:
•	Delivery of vital infrastructure or services quickly.
•	Generation of funds to support debt reduction or redeployment of investment into other social programs.
•	Improvement in the efficiency of public-sector construction, operation and maintenance.
•	rationalization of complex and restrictive regulations.
 	The more precisely a task can be specified in advance and its performance evaluated after the fact, the more certainly contractors can be made to compete, the more readily disappointing contractors can be replaced or penalized, and the more narrowly government cares about ends to the exclusion of means, the stronger becomes the case for employing profit-seekers rather than civil servants.  Profit seekers cannot be expected to exceed the literal specifications of a contract.  The less completely can duties be defined in advance, the more valuable is bureaucracy.    The fundamental difference is between competitive output-based relationships and noncompetitive input-based relationships rather than between profit seekers and  civil servants per se. 
	The Post Office is another good example—why  shouldn’t we privatize it?  The U.S. Constitution does not stipulate a government monopoly but it does give Congress the power ‘to establish post offices and post roads.’  It has  a monopoly of first class mail.  This was certainly needed two hundred years ago---for an agrarian society.  But today is a different age and a different world. Remember we have an industrial age government for a knowledge age civilization. Postal workers’ wages are 40 percent higher than those of the average U.S. worker.  Service is slow and unreliable. The number of postal employees has grown by more than 100,000 between 1981 and 1992.  Meanwhile, the cost of first class stamps has risen from six cents in 1970 to thirty-one cents in 1995, more than twice the rate of inflation.  More than 10 percent of the current Post Office budget now goes to private operators for transportation, sorting, and rural delivery, in essence admitting its inability to serve some areas on a public basis.   President Reagan’s Commission on Privatization in 1988 recommended the federal government sell Amtrak and Postal Service. Our recommendation is to Privatize Postal Service.  The government should sell stock issue to public--all assets and liabilities.  Union renegotiate contract with new management.  First class postal monopoly eliminated.  Be competitive for all classes of mail.  Require for first 5 years to continue services in current areas even if losing money.  Must provide 2 years notification if plan to drop service.  U.S. government should use proceeds for high technology grants, educational assistance, research centers, information highways, etc. The question arises how do we know that the  people who will eventually run the Post Office do not abuse the service they are providing?  Because it will not be a monopoly but just one company competing against many. AT&T may be the largest interstate carrier but it does not have monopoly status.  With MCI and Sprint and several others, it has to compete heavily, on price, on quality, on service, delivery.  The Post Office will be just like that.  Even if it were to be sold to a company, eliminating the monopoly it has over mail service will make it one of many out to get the business.  With the added economic system changes, the new private Post Office will not be run  for short term profits but for the long term.  No doubt can exist in our minds that the  post office will run any better.  
	The Netherlands announced in April 1994 that it will shortly begin to sell a majority interest in its post and telephone monopoly.    Britain proposed in 1994 that will have a public equity offering that will place a majority of the shares in private hands. Sweden is letting private companies compete with the state-run  systems in delivering mail in Stockholm. What makes the United States Postal Service any more efficient or different than those European systems?
	Another idea whose time has come is the contracting out delivery of social services to nonprofit community based organizations.  Arizona, rather than setting up a state bureaucracy to deliver meals on wheels or drug abuse programs, contracted them out to such organizations as the Urban League, Catholic Social Services, or Chicanos por la Causa (CPLC).  As a result, recipients get more compassion and more commitment form those delivering the services.  It also offers more flexibility; it is far easier to terminate contracts than to lay off civil servants.  CPLC in particular provides job training, counseling services, day care centers, meals in schools, training programs for unwed mothers, services for the elderly, shelter for victims of domestic violence, and alcohol, mental health and drug abuse programs, all contracted from the city and state. 
	We are not naive to believe that all government programs can be privatized. Some areas  can not privatize as much as in others.   Some degree of oversight will continue to be needed, just like an umpire presides over the game.  The umpire does not play the game just makes sure the rules are fairly administered. Any government services which are privatized will remain under government oversight, government umpiring to guarantee the freedom is not abused and the public is protected. The difference is that the government will be the administrator,  its proper role, not the doer.

X.  Recommendations-- New Ventures

	Job creation does not occur primarily in huge fortune 500 companies but in mid- sized and small enterprises.   Companies with fewer than 20 employees spawned 47% of all new jobs form 1976 to 1990.  However, this growth is slacking.   Biggest impediment to job creation is government; unemployment insurance and worker’s compensation with social security can add over 25% to the cost of taking on a new worker.  Companies are, in essence, being penalized for hiring people, having little incentive to add full time employees. Incentive therefore exists for overtime or temps. 
	A big piece of the American urban experience involves being able to trade their way freely to a better life--beginning as street peddlers and building up from their.  
protectionism.   ability of those on the inside to exclude new entrants.  About 10% of all jobs in the US require some sort of a license.  Licensing procedures tend to be onerous and reinforced by antiquated laws.  The most guaranteed right in America should be an individual right to attempt to earn a living in his or her chosen field of endeavor.The rights of economic liberty are the least protected right owned. Would-be entrepreneurs should be allowed to walk into city hall, register their business at one location for a nominal sum and walk out with the necessary license and tax identification number.  The paperwork, cost and confusion resulting from not being able to do so drives would-be entrepreneurs from the white market into the gray and black markets.   These types develop contempt for the government because they no longer see it as their ally.  In the underground economy, there are no contracts.  Matters of dispute are often settled with a gun or a beating.  In the mainstream economy, an implicit understanding exists between government which acts as a defacto partner to business by protecting their property rights.  Half of all the economic activity in Latin America involves the informal or underground economy.   Much of that results from bureaucratic ineptitude or corruption which drive poorer less well connected entrepreneurs underground.  Entrepreneurs operating in the non-regulated informal economy have built 43% of all housing in Lima and provide 90% of all its public transportation.  When does the US economy start behaving like Peru’s with many of its entrepreneurs heading underground, driven by a system deemed arbitrary and corrupt. Lack of access of capital at grass roots will hasten its occurrence.  It is this lack of creation of small businesses in America’s urban areas which is hastening the disintegration of economic community there.  This must be reversed by making it easier for small operations to open and prosper, that is, to eliminate the bureaucratic tendencies and time consuming and expensive licensing requirements which create the underground economies now being seen.  A second requirement is for availability of lots of low levels of capital for these small underground entrepreneurs. Called microloans--loans for individuals to start up or improve small businesses, these are becoming increasingly popular across the country.  Quasi-public or community non-profit associations must be able to easily provide these without burdening the individuals with paperwork and requirements, otherwise the programs will fail. 
	Small, new businesses have been the main driving force for the economic growth of the eighties, contributing virtually all the new jobs born during that decade;  from 1987 to 1992, small and midsize companies created all of the 5.8 million new jobs while companies with 500 or more employees recorded a net loss of 2.3 million jobs. The economic growth, the new jobs are not coming from the Fortune 1000 firms but from new ventures, new companies started by entrepreneurs.  Cognetics, Inc., a Cambridge Massachusetts research firm estimated that in 1993, small business is expected to generate an additional 1.7 million jobs in the U.S. while companies with 25,000 or more employees will shed 300,000 people.  This has not always been the case; the share of business receipts going to small business (less than 500 employees) fell from 52% to just 29% between 1958 and 1979. Smaller firms have an average of 50% to 100% higher sales per employee than their larger counterparts in many industries.  The myth of small company mortality, that most small companies fail within the first five years is being shattered.  A D&B study of nearly 250,000 small companies that started operations in 1985 showed that nearly 70 percent of them were still in operation in 1994. Furthermore, the smallest companies had the highest rates of survival, the study showed.  
	The U.S. government reported in  The State of Small Business: A Report of The President, that, for the period 1972-1982, small business responded more quickly to market opportunities and created more than their proportionate share of new jobs. Small business dominated industries added jobs at a rate almost twice that of industries dominated by larger firms.  Small firms seem to perform well in periods of expansion as well as contraction in the economy; on balance all the net new jobs added to the economy between 1980 and 1982 were added by small firms.  Industries dominated by small firms posted an average job growth rate of over five times higher than large firms. The same report indicate 67% of all new jobs are created by small business.  Researchers in England, Holland, and many lesser-developed countries have found similar results.  	
	The 1987 Statistical Abstract of the U.S. shows the amount of employment in firms with between 20 and 99 employees grew annually by 3.64 % between 1975 and 1984 but employment in firms with more than 1,000 employees grew annually by only 1.25%.  During the eighties, almost all the jobs gained were from small firms. Between 1982 and 1986, the American private sector created over 18 million new jobs, of these 14 million were created by new businesses.  During the 1980s, small businesses created more than 20 million jobs while Fortune 500 companies cut 3.5 million jobs.  By 1991, The Fortune 500’s share of total non-farm employment in the U.S. had dropped to 10.9%.  David Birch at MIT examined a Dun & Bradstreet sample of 5.6 million firms and reached the conclusion that companies with fewer than 100 employees created 80 percent of the net new jobs in the U.S. economy during the 1970s.  Birch’s data suggest that the high rate of business failures in the U.S. during the early 1980s, accompanied by unprecedented levels of  business starts and venture capital--signified not a declining economy but a dynamically changing one; Japan’s economy had business failure rates twice as high as those in the U.s. and yet grew three times as fast during the past 25 years.
	Small, entrepreneurial firms are leading in the economic creation of wealth and jobs. The smaller firms do not face the constraints imposed by large investment in existing technology; thus they are both free and compelled to innovate. Being small, they are more flexible than larger firms.  As new firms start up and others fail, they are testing out new products, processes, and forms of organizations without committing large amounts of resources and without causing disruption if they fail. The relative advantage of small firms exist in those industries where there is little need to raise capital funds or where the absolute capital requirements are small.
	Yet the nineties have been unkind to small businesses.  The Bureau of Labor Statistics estimates that new businesses added only 144,000 jobs in 1991 compared to 1.5 million in 1990.  During 1992, small businesses were adding jobs at a rate between 10,000 and 20,000 per month, one-fifth of their 1980s rate. What has happened? The financial environment during the nineties has been unfriendly to small businesses with the banking crisis reducing or eliminating banks’ ability to support lending to small business. Rise in mandatory benefits and health insurance has also plagued small business.  Instead of hiring additional workers, they are deferring new employees, hiring temps, or paying overtime to existing workers.
	MIT economist David Birch spent five years examining D&B data on 5.6 million American firms.  Their study indicated that all areas lost about 8 percent of their jobs every year, basically from firms shrinking or dying, not many at all form firms moving elsewhere.  Fifty two percent of all new jobs were created in independent firms with  20 or fewer employees and 80 percent of all new jobs were created by firms four years old or younger.  Nonetheless, most small businesses are irrelevant to the process of innovation and growth; as it is innovation that is the catalyst, not the size of the business.  Only between ten and fifteen percent are potential growth companies (these ten percent end up creating 90 percent of the jobs and don’t stay small for very long.)  The others are pizza parlors, gas stations, copy shops which provide services to other businesses and their growth is driven by other businesses.  It is newness and innovation which are critical.  
	Entrepreneurs are important in the spurring of innovation through the start-up of new small venture firms.  A high correlation exists between the creation of new firms and innovation potential due to the nature of the small firm and the inertia that exists in large companies.  The large industrial laboratories are likely to be minor sources of major (radically new and commercially or militarily important) inventions; contrastingly, they are likely to be major sources of “improvement” inventions.  
	The National Science Foundation found that small companies produce four times  (other estimates as many as twenty-four) more innovation per research dollar than large companies. Small firms (new ventures) produce two and one-half times as many innovations as large firms per employee. Small firms also  bring innovation to the market more quickly.   The downsizing of large enterprises can only accelerate the entrepreneurial boom as middle managers find  few other options available to them. In 1982, mean small company innovation rate was 322 innovations per million employees compared with 225 innovations per million employees for large companies. While large company innovations were relatively high in the rubber industry, small company rates were high in the production of nonelectrical machinery and electrical equipment.  Large company rates were relatively low in leather, textiles, and petroleum; small company rates were low in food, rubber and paper.  large companies hold relative advantage in capital intensive industries, advertising intensive, concentrated and highly unionized.  Small companies hold the relative advantage in high technology industries.  Service companies tended to have less than 10 innovations per million employees, a rate 5% that of manufacturers. 
	The U.S. Office of Management and the Budget credits more than half of the technological advances in this century to individual inventors or small companies.  A Harvard Multinational Enterprise Project study of 703 innovations introduced in the United States after 1945 found, for example, that only 133 innovations were introduced by multinational enterprises.  Of 492 innovations introduced in Europe and Japan in the same period, only 107 were introduced by multinational enterprises. The origins of sixty-one major inventions of the twentieth century lead credence to the statement that the preponderance of new innovations come from small new ventures.  Of the sixty-one about two-thirds were made after 1930, and over 40 percent were made after 1940.  Twelve of the sixty-one major inventions (or 20 per cent) could be attributed to  the laboratories of large corporations.   On the other hand, thirty-three of the sixty-one inventions were the product of the work of independent inventors. During the decade 1946-55, twenty seven significant innovations were determined; of the twenty-seven, seven (or 26 per cent) were the products of large industrial laboratories; The remainder came from independent inventors.  Smaller firms are disproportionately prolific contributors to the generation of important technological innovations. Most R & D in large firms is geared toward improvements or minor changes in existing products.  Moreover, the standard objectives of the research programs of most large firms indicate an emphasis on immediate and short-term benefits (over ninety percent have windows of five years or less). The implication seems clear:  smaller firms are disproportionately prolific contributors to the generation of important technological innovations.
	The total innovation rate yields an average small firm innovation rate in manufacturing of 0.309 compared to a large firm innovation rate of 0.202, a 50% increase. Large firm innovation rate is highest in rubber, instruments and chemicals while the small firm innovation rate is relatively high in instruments, chemicals, nonelectrical machinery and electrical equipment. Rates vary significantly across industries. Not coincidentally, the most innovative industries are those the small firms excel at and dominate.  The U.S. Small Business Administration Innovation Data Base finds that small firms introduce about 2.4 more innovations per employee than do their larger counterparts. Research expenditures by firms with revenues under $100 million grew 69% faster during 1991 than at companies with revenues exceeding $100 million.   R&D budgets amounted to 8.7% of sales at small companies while accounting for only 3.9% of sales for larger companies. During sluggish times, small firms tend to maintain or even increase their R&D expenditures because they are focused, see R&D as their lifeline as investment into their future, an investment that tends to payoff sooner than for larger firms.   
	Five factors favoring the innovative advantage of large firms include: high fixed costs,  only firms that are large enough to attain at least temporary market power will choose innovation as a means for profit maximization, R&D is a risky investment and small firms engaging in R&D make themselves vulnerable by investing a large proportion of their resources in a single project;  scale economies in production may provide scope economies for R&D;  and an innovation yielding cost reductions of a given percentage results in higher profit margins for larger firms than for smaller firms.
	Factors that place small firm advantageous position for undertaking innovative activity include: the bureaucratic organization of large firms is not conducive to undertaking risky R&D; innovative activity may flourish the most in bureaucratic free environments; smaller firms place innovative activity at the center of their competitive strategy; sales possibilities for making narrow detailed advances are often too modest initially to interest giant corporations; and it is easier to sustain fever pitch of excitement in small organizations.
	The differences between the innovation rates of large and small firms can be generally explained by the degree of capital intensity, the extent to which an industry is concentrated and is comprised of small firms and the total innovative intensity of the industry.  The relative innovative advantage of large firms tends to be promoted in industries that are capital intensive, advertising intensive, concentrated, produce differentiated goods and highly unionized.  In industries that are highly innovative, required skilled labor, and composed predominantly of large firms, the relative innovative advantage is held by small firms. 


VIII. Importance of New Ventures
	Why are small firms and the continued creation of small new ventures within a society so important to the economic and innovative powers of a society?	
	(1)The distribution of economic power through a system of small firms lead to a more favorable distribution of power in society in general.  The existence of small firms has positive effects on political and social stability. Conversely, it is often held that excessive concentration of economic power has unfavorable and destabilizing effects in the long run.
	(2) Another effect of small ventures and entrepreneurs is to constantly maintain a state of competitiveness within the industry.    A high degree of market concentration leads to economic inefficiency.  This argument can be interpreted to mean that monopoly power leads to misallocation of resources.  It can also be interpreted in terms of dynamic efficiency,  that monopoly power leads to complacency, which in turn leads to a slower rate of technological progress than otherwise be possible.  Small firms are a necessary competitive spur to existing oligopolists; their presence guarantees a certain market dynamism. The effect of competition on innovation is not only to motivate profit-seeking entrepreneurs but to jolt conservative enterprises into the adoption of new technology and the search for improved processes and products.  From the point of view of the static efficiency of resource allocation, the evil of monopoly is that it prevents resources from flowing into those lines of production in which their social value would be greatest.  But from the point of view of innovation, the evil of monopoly is that it enables producers to enjoy high rates of profit without having to undertake the exacting and risky activities associated with technological change.  A world of monopolies, socialist or capitalist, would be a world with very little technological change.
	(3) Small firms are necessary complement , rather than an alternative, to the economies of scale offered by large firms.  Large-scale modern process industries, for example, cannot effectively perform their services without an appropriate ‘hinterland’ of small, user-oriented firms and an industrial fabric marked by a wide network of subcontracting  between companies.
	(4) Small firms should be valued more highly than their quantitative share of the market suggests, because their diversified products are better able to cater to the individual tastes of consumers at a time when the dominant technological regime, dictated by economies of scale, tends towards a reduction in variety. 
	(5)Small firms are sometimes seen as a buffer to sharp fluctuations in employment. During good times and bad, small firms create jobs.
	(6)Small firms keep larger firms motivated. Corporations are profoundly concerned with their market share and any innovation that increases one firm’s share sends the others scurrying for innovations to recapture their share. Enterprises that would otherwise have been quite content to go on producing the same products in the same ways, and at a reasonable profit, if they could only be protected from the intrusion of competition, are propelled to innovate to survive.
	(7) Another advantage smaller enterprises have which helps account for their impressive contributions to innovation include the fact that they are less bureaucratic.  Since many advances are dependent upon narrow detailed advances, and such narrow detailed markets are often too modest to interest large corporations, smaller enterprises contribute.  It is is also easier to sustain a pitch of excitement in small organizations where the links between challenges, staff and potential rewards are tight. 
	Small firms make at least four important contributions to industrial markets:  they play an important role in the process of technological change; they generate much of the turbulence in competition; they create international competitiveness in newly created product niches; and they excel in job generation.  
	Yet sometimes bigger is better.  In four particular industries, scale is crucial to success.  Economies of scale based on long production runs and massive capital spending such as commodities (chemicals, paper, oil, foodstuffs) provide advantage to large players.  Marketing/Distribution intensive companies  (Coca-Cola, Anheuser-Busch, Nike, P&G) where the product itself may cost little to make but the major players’ huge marketing budgets or extensive distribution networks create barriers to entry include industries such as beverages, processed foods, and other consumer goods.  Bigger volumes can mean lower unit purchasing costs for producers who rely on a vast network of suppliers (Retailers such as Wal-Mart and Toys ‘R’ US; manufacturers such as General Foods and Toyota).  Technology intensive businesses where scale can help to fund risky R&D and to sell a short lived product in volumes large enough to recoup investment (pharmaceuticals and semiconductors). However, in these industries, fixation on production can often lead to being tied down to a particular technology and slow to change to the next generation; this can provide small businesses a significant technological comparative advantage.
	The impact of small business, however, is not the same throughout the world.  Real differences exist between U.S. new ventures and their European or Japanese counterparts.  Small Japanese companies appear to be thriving but most service as little more than submissive captive suppliers to dominant big companies with no hope to expand beyond what the larger company orders from them.  Many European small businesses  are also doing fine, supported by heavy state subsidies.  The U.S. model would not likely succeed in these locales.  In Hong Kong, yes.  In Germany, where 300,000 small and midsized companies generate a large portion of its exports (the Mittelstand), possibly yes.  The presence of small firms within a society can be attributed to four factors: the stock of entrepreneurial talent; managerial and entrepreneurial ability;  scale economies and capital requirements; and entrepreneurial strategy deployed by small firms. The key is not small business but new business.  As a result, the Small Business Administration should be renamed the New Ventures Administration and programs should be revised towards that new mission.  It should work with quasi-public and private venture funds to supply needed  funds to new ventures. 


V Recommendation-- Venture Capital
	 In the United States when there has been a high level of venture capital available, innovations have flourished.  In times of less venture capital available, a lower rate of formation of new ventures is seen, less entry, less competition, and less innovation as a result. The lack of venture capital has a chilling effect on start-ups and the resulting level of innovations.  In 1969, the U.S. Congress increased the maximum tax on long-term capital gains from 28 to 49 percent and  added regulations restricting pension funds’ ability to invest.  This decision had a devastating effect on the amount of financial resources available for venture capital, and the incentive to invest in a new companies was greatly diminished.  In 1969, $171 million of new private capital was committed to venture capital firms; by 1975, after the new tax law took effect, this figure dropped to $10 million, a mere 6 percent of the capital available six years previously. From a high point in 1972 (of 586), the number of new technology-based firms financed by issues on the U.S. stock market declined rapidly (100 in 1973), and remained at a low level (40 in 1977) until 1979, when they began once more to increase (to 81).  This was paralleled by a distinct decline in venture capital.  
	In 1978, after intensive lobbying by Silicon Valley and high-tech firms elsewhere, Congress reversed its earlier decision and rolled the maximum capital gains tax back to 28 percent and pension fund managers were once again allowed to invest in innovative small firms.  As a result, between 1978 and 1980, the number of new issues trebled (to 250).    In 1981 Congress further decreased the maximum capital gains tax to 20 percent.   Venture capital  grew from $600 million in 1978 to $4500 million by 1986. Venture capital disbursements passed $1 billion for the first time in 1980, peaking at $4.8 billion in 1987 before falling to $2.1 billion in 1990. By the end of 1982, the amount of new private capital committed to venture capital firms had risen to over $1.4 billion, eight times the amount of 12 years before. The eighties saw a boom in small businesses, IPOs, and not coincidentally the economy as well. 
	The GAO  in 1982 measured the impact of the 1978 tax cut on venture capital. By examining and extrapolating a sample of 72 companies launched with a total of $209 million in venture funds which directly created some 135,000 jobs, generated $350 million in additional federal tax revenues, and produced $900 million in incremental exports by 1982,  the GAO determined the nearly $7 billion in venture capital outlays directly generated more than 4 million new jobs, over $12 billion in new federal tax revenues, and $31 billion in new exports through 1986.
	As to be expected, after the tax cuts of 1982, the IPO market zoomed to $24.1 billion in 1984 than falling again in response to the 1986 act to a low level of $6 billion in 1990.  Therefore the result of the capital gains tax increase in 1986 was to reduce by 65 to 75% the level of funds available. Venture backed IPOs fell from 80 in 1987 to 40 a year in 1988 through 1991; by 1993 the number had reached 140. The Arthur D. Little study of new technology-based firms in the United Kingdom and West Germany  argues that a tax system which successfully motivates inventors, entrepreneurs, and investors will more effectively stimulate innovation than any direct government assistance to new enterprises.
	 In 1991, the number of companies getting funds fell from 333 to 173 with investments one-third of what they were in 1990 to a less than $1 billion annual rate. 	 As of 1993, almost $7 Trillion of unrealized capital gains exist due to the high rates (Forbes, October 25, 1993, pg. 246). Most of venture capital in handful of industries, biotech and computers.  Still affects only a minuscule portion of all firms; only 1 % of all startup firms had obtained funds from venture capital.  The biggest source of external risk capital is from the informal capital market--private individuals, the so-called ‘venture angels’, often relatives and friends.   One estimate is that 250,000 angels put in $10 to $15 billion  into 40,000  companies every year.
	Many believe the cause of the 1990 recession was the 1986 Tax Reform legislation which raised the top rate on capital gains to 33% from 20%. Not only was the venture capital market seemingly affected by changes in the capital gains rate but also the IPO (Initial Public Offerings) market.  The IPO market reached $9.7 billion in 1969 (in 1991 dollars) collapsing to $2.8 billion in 1970 after Congress increased the capital-gains tax rate.   The 1993 Deficit Reduction Act which further skews saving incentives can only hinder further venture capital and IPOs.   A meaningful differential must be maintained  to get people  to commit their funds for a long period of time as opposed to a short period of time.  While that doesn’t directly hurt the flow of funds of the venture capital, it indirectly does because the ability to become liquid is really through the sale of entities in the public market. However, a small provision in the act reduces the tax by 50% if an individual’s direct investment in a small company is held for five years or longer.   Pending in Congress in 1993 were the  Small Business Incentive Act of 1993 which would make it easier for small businesses to issue securities and the Small Business Capital Enhancement Act which calls for federal and state governments to match funds set aside to cover loan defaults.
	Other  sources of funds also help small business.  In fiscal 1993 alone, the Small Business Administration backed $6.4 billion in loans--a 40% increase since 1991.  AT&T created the AT&T Small Business Lending Corporation in 1992 to provide financing to small outfits. These can help make up the difference, but not all the way.  Venture capital funds favor latter stage investments; companies under $5 million are still finding it very difficult.  Many states are creating venture capital fund pools to cater to fledgling companies. 
	 Venture capital firms have played a highly significant role in bringing the high technology ventures (including biotechnology) to the marketplace.  Because of size and capital constraints, few of these firms are in a position to scale up independently to the production stage.  For many, the possibilities of eventual extinction or merger with larger companies loom large, especially in the event of a lengthy  economic downturn.  Others may lose their competitive edge in basic research through a financially induced need to reorient their activities towards quickly marketable products.  Nevertheless, their organizational flexibility, and the special financial and intellectual incentives they offer, have enabled the small firms to attract talented researchers who might not have left the freedom of an academic laboratory for the more bureaucratic ethos of a large corporation.
	Denial of venture capital to an entrepreneur  impacts the innovative process in several ways.  Denial forces delays in terms of timing in arranging alternative financing, and thus the innovative process is hampered by an inability to obtain adequate financing. Many promising firms most have failed after being  denied venture capital. Modern entrepreneurs voice unanimous concern about loss of operating control and felt the cost of venture capital in terms of dilution of equity is high. 
 	It appears that the level of innovation and economic growth within a country is directly proportional to the amount and the ease with which new venture capital can be made available for new ventures.  Yet these venture capital funds must be private 

Home Page	
Preface & Introduction	
Chapter 1: Responsibility  
Chapter 2:  Leadership   
Chapter 3: Government  
Chapter 4:  Congress    
Chapter 5: Regulations and Bureaucracy   
Chapter 6: Defense  
Chapter 7: International Affairs 
Chapter 8: Crime and Justice  
Chapter 9:  Civil rights 
Chapter 10: Economic  
Chapter 11:  Education  
Chapter 12:  Health  
Chapter 13:  Planning and National Goals  
Conclusions  

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