We need prosperity, not austerity, now!

It is the best of times, it is the worst of times. Thankfully, American corporations are generating record earnings, the stock market is approaching its all-time high, banks are flush with cash and their executives are again being awarded mega-bonuses. Oil companies and farmers are likewise enjoying record prices and profits, as are those who have invested in gold or just about any other commodity. Things could hardly be better.

But the little guy endures the worst economic suffering since the Great Depression. He can’t get a job, can’t pay the mortgage, is losing his home, and the cost of basic food, gasoline, utilities, tuition and transportation is rising. Things could hardly be worse.

{mosads}While the upper echelon of society is doing so well, the federal government is running unsustainable budget deficits, and some politicians are advocating we fix it with an aggressive austerity program that will largely destroy the social safety net that has protected the most needy for generations.

Yes, the government must cut spending or go broke. But accumulated deficits mean that even harsh cuts won’t remedy the problem because of interest costs. The government could eventually restructure its debt, hurting creditors, or declare bankruptcy, ruining its credit rating and limiting its ability to borrow in the future.

America is like a family that has borrowed up to the hilt and whose overextended debt jeopardizes its ability to obtain any additional loans and threatens its solvency. The family must put extra members to work to generate extra income to pay down that debt. Family members already working must work overtime or work two jobs or on weekends to increase the family’s gross receipts — its prosperity. As with that family, so with America. Government austerity alone will not suffice. We need only look at the consequences of austerity measures in Europe to see the failure of such an approach.

The answer lies, rather, in economic growth achieved by a stimulus program that will expand government income and bring prosperity and a concomitant reduction of deficit and debt.

We can do this if we respond decisively as we did to the crisis following Lehman Brothers’ bankruptcy in 2008. Then, we averted a far more devastating crash and revitalized part of our economy now enjoying “the best of times.”

Once we decide something is essential, we act without delay or even any consideration of costs, as we did after the Pearl Harbor attack in 1941 and the attack on the World Trade Center in 2001. Cost didn’t cause even momentary hesitation. We knew that we needed to act, and that we would deal with the consequences after we prevailed.

The present economic crisis presents an extraordinary opportunity, for it is in every way equal to or worse than the crisis of 2008, which prompted the Treasury and Fed to rescue financial houses with trillions of dollars in bailouts.

It is Main Street that should be “too big to fail.” The enormous income disparity between ordinary Americans and the top 10 percent could at some point provoke rebellion and the destruction of the greatest economic system in history, and the American way of life. Mass dissatisfaction could trigger — probably not by violence, as it has in the Middle East, but by the election of socialists promising equality and redistribution of wealth.

No group has more at stake than the wealthy in preventing this. Warren Buffett had great foresight when proposing that he and others enjoying the fruits of capitalist prosperity should pay higher taxes. His proposal was not an act of mere sympathy or charity. He is smart enough to envision the disastrous alternative.

We’d all love to pay less in taxes, but that’s not in anyone’s best interest. In the five years before President Clinton raised taxes in 1993, real annual GDP growth averaged 2.5 percent. In the five years after the tax increase, growth averaged 3.5 percent. The five-year growth rate before the Bush tax cut of 2003 was 2.9 percent, then it fell to 2.2 percent in the five years after the tax cuts.

From 1949 to 1963, when the top marginal tax rate was 91 percent and 92 percent, real GDP grew by 4 percent a year. Arguments for lower taxes, regardless of the status of our American economy, are self-serving and not supported by the facts.

We should all be able to agree on the need to simplify the tax code, which grew from 508 pages in 1940 to an incredible 71,684 pages in 2010. My own preference would be to eliminate the income tax and replace it with a sales tax on everything excluding all essential items (food, rent, medical services, prescription drugs and items of clothing priced under $100). This would redirect brilliant legal and accounting minds now toiling in the business of tax avoidance into more creative and productive work. Such a sales tax would be progressive, since the rich spend the most. It would capture revenue on all purchases and expenditures (thus taxing even illegally-gotten income, which currently is not even reported). When the economy booms or when inflation spikes, the rate could be raised to slow consumer spending; conversely, in a slowdown, the sales tax rate could be cut, encouraging consumer spending.

What do you think?

In addition to raising taxes, we need to cut military spending to the point where instead of spending almost as much as all of the rest of the world’s countries combined, we resolve to spend only a little more than that spent by the 10 countries who spend the largest amounts on defense.

But even if we do raise taxes and judiciously cut spending, it would not be enough to dent our astronomic debts. To do that and to revitalize the economy, we need a massive growth program that will produce more jobs and cut spending on unemployment. This will immediately increase consumer purchasing power and demand, boost sales, profits and capital investment, and bring renewed prosperity.

The most effective way to revitalize the economy, cut deficits and resuscitate Main Street would be the major stimulus of a massive government-funded, but private sector-operated, infrastructure construction program similar to the way our government funds defense production by private-sector companies such as Boeing, Lockheed Martin, Northrup Grumman and GE. 

This would immediately create jobs, essential to reviving the economy, for those hurt worst by recession — construction industry workers suffering 20 percent unemployment, and the young whose unemployment rate is higher still. Even many college graduates can’t find jobs. All of these people could become productive taxpayers. And by building bridges, tunnels, the electric grid, airports, seaports, dams, sewers and water systems, as well as schools, hospitals, housing and all such invaluable assets, they would improve everyone’s quality of life for generations to come.

Such a program, though it may temporarily increase the federal deficit, would instantly and enormously boost economic growth. This investment would handsomely reward the country and its people. Just a single percentage point of economic growth generates government revenues that would reduce the deficit by $3 trillion over 10 years. An infrastructure jobs program could trigger extra growth of 2-3 percent or even more and, together with the related reduction in entitlement expenditures and the increased revenues from the newly employed and the profits of the infrastructure companies, readily solve our country’s drastic deficit. 

So let’s grow and prosper.

Davis, a shareholder in The Hill’s parent company, is a Wall Street investment banker and author of Making America Work Again and From Hard Knocks to Hot Stocks.