Let's broaden the options for dealing with underfunded public employee pensions.

As we look at options for public pensions (hopefully local and state politicians will look at this hard during 2011) the options discussed are always far too narrow.

Some cities are discussing putting new employees on 401k type programs with no pensions and leaving the older workers alone. Some cities are discussing breaking the contract, and telling their pensioners “we know we promised you a $2,000 a month, but we can’t do that anymore, so we are going to pay you $1,200 instead.”

But one concept that is never discussed is how the private sector segued from pensions to 401k programs. They rarely reneged on their pension program promises, but when they didn’t make sense anymore they said “no mas”. They said: "you get what you have been promised. But tomorrow, you will not get a penny more added to your future pension payment. Instead we will put dollars each year into your 401k program and it is up to you to manage."

Why isn’t this part of the discussion for underfunded and broke public pensions?

Estate Taxes: I differ from most Libertarians on this one.

It is hard to find those on the right or from the Libertarian movement that support an estate tax.

Those that hate the idea of the estate tax point to the fact that much of the income that created the estate has already been taxed at least once. And what right does the government have to tax an estate that has already been taxed? But there are plenty of other examples of double taxation. Federal, state and sometimes city income taxes are on the same income. And then if one buys a car after having paid the income tax, you will then pay sales tax on the purchase - this is clearly double taxation. And then you pay gasoline tax and annual license fees in the future. Not double taxation - at least triple or quadruple taxes are the norm.

Critics also point out that some inheritors must sell family farms or small family businesses in order to pay these taxes. I say “tough luck”. After all you are still getting an exemption of several million dollars and only then under the new tax you must pay 35% of the rest in taxes. So if Daddy left you a Gentleman’s club worth $10 million (and if this was his only asset) then you would have to pay $1.75 million in taxes ((10-5)*.35=1.75). So you are telling me that you can’t finance the $1.75 million on a business worth $10 million and still make a nice living?

If you can’t find a way to finance the $1.75 million then you may have to sell Daddy’s pride and joy, walk away with $8.25 million and find a way to eke out a living. And another entrepreneur probably more efficient and hardworking than you will buy the business and keep it humming and maybe even grow it.

The bottom line is that the federal government needs some (but far less than they are currently seeking) revenues. Something is going to get taxed.

But the three taxes that I favor over others are inheritance taxes, consumption taxes and higher gasoline taxes (a special component of consumption taxes). Forget the fairness issues (after all it only fair to tax everyone but me is the prevailing thought). But as a country we clearly need to consume less (while producing more) and we especially need to consume less gasoline. Gasoline (unlike electricity) is where we have a huge and growing dependence on the third world. We are at great risk of war if the oil spigots stop meeting our foreign oil addiction. And this is also a massive part of our foreign deficit and our country’s growing national debt. At 20 million barrels a day of imported oil (at $90 per barrel) adds up to about $650 billion dollars a year of money we are sending out of the country.

But back to inheritance taxes. By their very nature, wealth that is simply handed over to the next generation encourages the next generation to get softer, to consume more and is a disincentive for new generations to go and create their own wealth.

One inheritance tax exception that I support along with the vast majority is that there should be zero inheritance tax for a surviving spouse (and this has been the norm for most proposals).

The inheritance tax just enacted in Washington is actually a fairly reasonable compromise. The first five million is free from inheritance tax and then it is taxed at a 35% rate. Not bad.

Second and third generations on average tend to squander wealth that that has been created by their parents and grandparents. They tend to consume these estates rather than build them. This is clearly a generalization but you will find far more examples of this than where they have built on their parents wealth and generate more jobs than their parents would have done with the same money.

In general the more you tax something the less of it you get. But we will not have fewer deaths with an inheritance tax. But the more we tax consumption and gadgets and gasoline the less we will use.

On the other hand our taxes on employing workers (the employers share of social security and Medicare taxes and unemployment insurance premiums), and income taxes result in fewer workers being hired and fewer people working. There is no way to get around some of these taxes but they are by their very nature counterproductive.

So since we must have some taxes, I would start with the inheritance tax.

How do we bring manufacturing back to the US?

Since 2000, America has lost over one third of its manufacturing plants.
It is a cumulative problem, one issue after another, more and more regulation with no single law or regulation responsible for destroying it.

Once this manufacturing capability is lost, it is difficult to revive the sector. After we lose the expertise to build a prototype, it takes little time before designers even consider building a new product in this country.

In 1952, one third of US employees worked in factories, producing everything from makeup to televisions. Now no televisions are built in this country and Dell Computer just shut down their last US manufacturing facility in North Carolina. In 1965, manufacturing accounted for 53% of the US economy and in 2004 it accounted for only 9% - and it far less in 2010.

During the last couple of decades America got so good at building new homes, our energy, enthusiasm and innovation was mostly directed at this business. But we never exported any of these new homes overseas. We borrowed heavily from outside the country and built far to many McMansions rather than new factories to export goods to the rest of the world.

A lack of manufacturing is not only an economic issue, it is a security issue. The Allies might very well have lost World War II absent our ability to massively convert and scale up our manufacturing from autos and civilian goods into armaments, able to give us more airplanes, tanks and ships than the enemies had.

With reference to our college graduates, today only 5% of all graduates are degreed engineers. And of that measly 5%, half of those are foreign students that usually return home after their education.

Here are a few changes that would be a start to turning things around:

1) Outlaw unions in our manufacturing sector. Virtually no new plants start out unionized here anymore, but the threat of successful plants being unionized in the future is a deterrent to make the initial start-up investment here.
2) Do not require overtime until employees reach 50 hours a week.
3) Do not tax the profits on anything manufactured here and exported outside the country. Right now every industrial country in the world has a manufacturing tax advantage over the US. For all manufacturing here that produces products that remain here, reduce the corporate income tax to only 20%.
4) Do not make employers pay for unemployment insurance. The penalty for hiring someone is that if the world changes and you can’t afford to employ them anymore, often even if they are terminated for cause, the employer gets saddled with the costs of their unemployment benefits. This makes no sense to me.
5) Make all manufacturing employment "at will". If an employee is not performing, he or she can be replaced with a worker who can get the job done. Make it easier to hire, easier to fire, easier to manage and let successful and growing manufacturers better manage their labor costs.
6) Make all prototype costs for products built in the US free from taxes. If the prototype is built here, it greatly increases the chances of building the ultimate product here as well. Today most companies that need a prototype automatically send it to China with no thought of having it prototyped here.
7) Stop subsidizing silly college degrees (like Ethnomusicology, Sociology, Gender Studies) and narrow down the few college majors that government subsidizes to those supporting manufacturing.
8) Vastly simplify the regulations required to open and run a manufacturing plant here.
9) Do not mandate that manufacturers provide health insurance to their employees. Health insurance mandates are another penalty for hiring here and a good reason to open a new plant abroad.
10) Postpone for at least a decade acting on the emotions around the proposed cap & trade legislation. This legislation alone would take out another third of our manufacturing plants.
11) Change the tax incentive that makes the first $70,000 that Americans earn overseas tax free (there may still be overseas income tax). We don’t want to encourage Americans to work overseas any longer. They are welcome to do so, but what is the economic reason for the folks back home subsidizing it?
12) Change our immigration laws and put manufacturing entrepreneurs and professionals at the top of the list. Today an uneducated family member of someone already here usually gets priority. At the same time we put major limitations on engineers immigrating here and foreign graduating engineers staying here. This is nuts.
13) Stop subsidizing windmills and solar plants in this country. They either drive up the cost of electricity for our manufacturing plants or result in higher taxes. When the economics are right, then let's install them without subsidies.

Jeffrey Immelt, CEO of General Electric summed up the situation when he said: “We have become a pathetic exporter… we have to become an industrial powerhouse again but you don’t do this when government and entrepreneurs are not in synch.”

Get our wallets into gear?

For decades our entire economic policy has been geared towards getting Americans to spend more. This has worked so well that Americans individually (and collectively) are pinned down with record debt. This is most of the argument about extending unemployment benefits - the dollars given to the unemployed will be spent on average quickly and the multiplier effect will result in not one but multiple Xboxes being purchased. Of course the Xboxes are built in China.

But how much does it really help our economy to have the government borrow from China (the world’s leading producer and lender these days) in order to encourage Americans to buy another IPad or plasma television set?

Americans are already pretty darn good at spending - on houses, cars, gasoline, computers, cell phones and concerts. But Americans are not as good good at manufacturing and exporting goods to other countries. We used to be the king of manufacturing and exporting but no more.

When you are the wealthiest country (by some measures) and the biggest economy, the world grants you more credit than they give to Ireland, Greece or Nigeria. But even the big can fail and when they do it is louder, harder and messier.

Perhaps we should direct our entire focus on getting Americans to produce more. Let's expand our manufacturing to meet more of our own needs and to export to meet the needs of others. Let’s stop spending less on our own personal comfort and start producing to make the rest of the world a better place.

Let's have some good old fashioned trust busting in the banking sector

We haven’t done a darn thing about our US banks that are too big to fail. We would still have a massive problem if Wells Fargo, BofA, Citibank, JP Morgan or Goldman Sachs went bankrupt today.

Here is the answer. Let’s simply break all of the top five banks in two. Take all of their assets and all of their liabilities and split the baby. We would have Citibank A and Citibank B (and after four months we would make each of them bid on the underlying name and the other would have to establish a new name).

Three years later, let’s establish a system that any bank with assets that are greater than 600 billion will be split in two again.

We would have competition for checking and savings accounts again. We would have far more innovation and at this size we can allow these smaller institutions to take virtually any risk they want to take, because if they blow it then we can afford to let them go broke.

Labor mobility used to be a competitive advantage for America

Labor mobility has been a competitive advantage for America in the past. Workers were more willing to move their families for better work opportunities than in other parts of the world. This meant that it was possible to get the best workers where and when they were needed.

But three subsidies have made it far less likely for workers to leave one employer in one city (or even unemployment in one place) for a better paying job in another locale:
1) Homeownership. When your new home instantly went up in value, it was not hard to sell your old home and move up to an even nicer one in the new location. But it works as a disincentive when home prices have stalled or gone down. The worker has to either come up with cash to sell his old home at a loss or rent it out (probably at a monthly loss).
2) Company/government pension programs. If you work for a fire department and have 10 years with that fire district, you will take a major haircut moving to another fire department. When was the last time you heard of a public employee or a union employee leaving one pension program voluntarily?
3) Healthcare insurance. Granted you can get usually qualify for Cobra insurance where you pay for your former employer for insurance over the next 18 months but then what?

This is just another example of the unintended consequences of government interference in the marketplace.