By William M. Isaac for Forbes’ Blog

A passionate debate rages between “supply-side” economists, who believe the best way to stimulate the economy and create jobs is to lower taxes and reduce federal spending, and “Keynesians,” who believe we should raise taxes and increase federal spending.

I believe a more urgent need in stimulating economic growth is to restore confidence in the future of our nation.  Faith in government and major private institutions was shattered in 2008 when the government badly mishandled what should have been a manageable financial crisis and turned it into a worldwide panic.

The hemorrhaging has ended, but we have done little to restore confidence and hope.  Investors shun the stock market in droves, consumers tighten their belts and pay off debt, businesses hoard cash, and banks remain cautious about lending.

There is a strong sense that our ship of state is rudderless in a treacherous economic sea.  President Obama, to be sure, inherited a deeply troubled economy and huge federal deficits.  But instead of focusing like a laser on those issues, he spent the first 18 months of his presidency and virtually all of his political capital pushing through two massive and hopelessly complex bills on health care and financial reform.

It’s difficult to have faith in our future when the government, in the midst of an economic crisis, serves up bills as bad as these.  Neither bill fixes the economy or puts the government’s fiscal house in order.  Both bills create confusion, uncertainty, and higher costs that will inhibit growth.

The health bill ducks a major issue that raises health care costs beyond reason:  malpractice litigation against health care providers.  The trial lawyer lobby is apparently too powerful to touch.

The financial reform legislation would not have prevented the last crisis and will not prevent the next one.  A dysfunctional regulatory system that has brought us three major banking crises in the past 40 years remains in place, cobbled together with bailing wire.  Fannie Mae and Freddie Mac remain wards of the state and have resumed financing no down payment loans.

The Securities and Exchange Commission and the Financial Accounting Standards Board, which played huge roles in creating the panic of 2008, received get out of jail free cards.  Meanwhile, the five largest financial companies – JPMorgan Chase, Bank of America, CitiGroup, Goldman Sachs, Wells Fargo – control more than 50% of the financial system and remain too big to fail.

Restoring confidence in our institutions requires the political will to fix what is broken.  We are frightened by $13 trillion federal deficits that will only grow larger.  We all know that the solution is to slow the growth in spending, particularly in entitlement programs.

We cannot turn spending around on a dime, but we can act immediately to slow the growth rate of spending.  To get it done, our political leaders will need to exhibit more political courage than they appear to have.

It’s also difficult to have faith in our future when contemplating our public education system.  I met with Walter Shipley – the legendary head of Chemical Bank which is the foundation on which JP Morgan Chase was built – some twenty years ago.   Our major banks were all teetering due to sour real estate loans and loans to third world countries.  I asked Shipley what kept him awake at night, thinking he would talk about his bank’s credit problems.

His response took me by surprise, “The education system.  Half of the graduates of the New York City public schools are not trainable for entry level positions in our bank.  The gap between the haves and have not’s in our society will become intolerable if we do not fix this problem.”

We’ve done nothing meaningful to address Shipley’s concerns over the past two decades.  Among the many issues that must be addressed are weeding out ineffective teachers and ending our practice of closing the schools each summer, which accentuates the divide between the haves and have not’s.  These changes require politicians willing to deal with the teachers union.

Let me return to the tax and spend debate.  A good deal of our nation’s success is due to democracy and free enterprise.  We have gone dangerously far in the direction of state control of the economy, which is causing many to doubt our future.  The best performing nations in recent decades are those, such as China, that have gone from a state-based economy to a more market-based economy.

I come down on the side of those who want less government spending and lower taxes, particularly when the economy is so weak.  What we do not need are more short-term tax cuts or spending programs designed to buy votes in November.

I believe most of us would be willing to pay somewhat higher taxes as part of a package that reduces spending and the deficits and produces a better trained and educated workforce.  Action along these lines would go a long way toward restoring confidence and leading us into an era of growth and prosperity.

Check out my latest book, Senseless Panic:  How Washington Failed America, and visit my website at www.williamisaac.com

Original Article Located Here.