5 Ways the Next President Can Fix the Economy

"How the Next President Should Fix the Economy" is the current cover story at Time magazine. I think I can briefly sum up the 3,000-word story, written by Justin Fox, thusly: This election is a biggie for the economy. Insecure Americans want higher taxes and more regulation. Government should spend more on infrastructure to combat income inequality. Get rid of the Bush tax cuts even if it weakens the economy. Raise energy taxes. Increase regulation on Wall Street. Nationalize healthcare, pretty much.

This article may well be prophetic. But it is supposed to be prescriptive. How does any of that stuff make the economy more productive and competitive? About the only idea presented in the whole story that might have a positive growth impact is getting rid of the mortgage interest deduction. Now here are five ideas that both liberals and conservatives might agree on that also could actually improve economic growth by embracing the American model of capitalism that's working wonders the world over:

1) Eliminate corporate income taxes, especially if you are also going to hit companies with all these energy taxes.

2) Get companies out of the business of providing healthcare benefits.

3) Index Social Security benefits to inflation, and extend the retirement age, allowing a big cut in payroll taxes for the middle class.

4) Create government-funded "innovation prizes" for key technology challenges.

5) Give universities incentives to create more science geeks, and offer grad students free-floating fellowships to choose whatever field they see as the best market match for their skills.

I think it is also worth noting what Diana Farrell of the McKinsey Global Institute told me is the best way to make America more productive and competitive. The real key, as Farrell puts it, is "creating maximum competitive intensity" to force companies to constantly innovate—whether through new technology or business models or management processes—to keep ahead of rivals. And when competitors respond, those innovations get spread.

"Europe is innovative, but that innovation doesn't get diffused throughout various sectors," she says. For instance, hypermarkets like Wal-Mart have long been frowned upon in France and restricted via zoning requirements. Likewise, free trade—or as Farrell puts it, "exposure to global best practices"—is critical to fostering innovation of all sorts. Globalization forces U.S. companies to innovate or die—and in the process raises our standard of living. Something to think about before we start undoing a quarter century of deregulation and tossing up new barriers to trade.