One Nation Under Debt

One Nation Under Debt

By: Vasko Kohlmayer

Show me the money! That seems to be the rallying cry of the dwindling
number of people who still support the federal government’s debt-
driving economic spending.

“I actually think that what we need now is another round of stimulus,”
said economist Joseph Stiglitz in a recent CNN interview. In this era
of budget busting deficits and mountainous debts, one would think that
these must be the words of a fiscal crank. But Joseph Stiglitz does
not fit the description: A professor at Columbia University, he won
the Nobel Prize in economics in 2001. He has also served as Chief
Economist of the World Bank and Chair of President Clinton's Council
of Economic Advisors.

Stiglitz’s sterling credentials notwithstanding, there was something
very wrong with his CNN appearance: Almost nothing he said made sense.
For instance, when asked by his interlocutor whether he was “worried
about the amount of money this government is spending,” Stiglitz
nonchalantly replied:

It all depends on what you do with the money. You know, businesses
borrow all the time. If you borrow and create an asset, then the
country’s balance ***, our overall wealth can actually be stronger.
If we invest in technology, if we invest in education, if we invest in
infrastructure…these are high return investments.

Comparing government to a business when talking about spending is
simply ludicrous. To begin with, any business with our government's
level of debt would be in bankruptcy by now. The public debt of the
federal government, according to the administration's own estimates,
will soon exceed America's annual economic output. On Stiglitz’s
analogy, it is as if a corporation carried a debt burden equal to its
yearly revenues.

The public debt, however, does not represent the full extent of the
government’s indebtedness. Apart from what it owes to holders of
treasuries, it is also liable for over $50 trillion in future payments
to beneficiaries of entitlement programs such as Social Security,
Medicare and Medicaid. Altogether, the government is on the hook for
more than $65 trillion, which is more than the world's annual combined
economic output.

Unsurprisingly, a growing number of observers are now coming to the
conclusion that it is simply impossible to meet all these obligations.
But rather than facing up to the problem, the political class has
found an easy way out. Using an accounting sleight-of-hand, they
simply erased entitlements from the national balance ***. Needless
to say, it is a crime for businesses to conceal their liabilities in
this way. Indeed, if any business behaved as irresponsibly and
dishonestly as our federal government does, it would end up in
bankruptcy proceedings, its bonds would be junk, and its management,
in all probability, in jail.

There is an even deeper problem with Stiglitz's analogy of Washington
and the private sector. This analogy is premised on the implicit
assumption that politicians – like successful business leaders – are
capable of spending money wisely and carefully. But a raft of recent
evidence indicates otherwise.

Take, for example, the government’s handling of the General Motors
crisis. Concluding that the company was “too big to fail,” the
politicians decided it had to be bailed out. They subsequently
“invested” over $50 billion to prop it up. At one point, they even
insisted that once the company recovered, taxpayers could make a
profit. Things did not turn out quite that way, however, when GM went
bankrupt. Now owning a majority stake in the reorganized company, the
US government is in charge. This is bad news, because it means that
more money will be lost. James Gattuso of the Heritage Foundation
warns that:

More harmful than the direct cost… may be the cost of government
management of this firm. History provides no reason to think anyone in
D.C. knows how to run a car company. A look at the enterprises that
Washington already runs – including the Postal Service and Amtrak –
does not reassure.

As if to make Gattuso's point, President Obama announced last
Wednesday that GM will get another $400 million for development of
advanced battery technology to be used in its hybrid plug-in car, the
Chevrolet Volt. Centered on a product American car buyers do not seem
to want, the whole project already has all makings of an expensive
boondoggle.

Some analysts estimate that close to $100 billion will have been
wasted by the time the politicians are through with GM. To put this in
perspective, the amount is more than five times the annual funding of
NASA. And let us not forget that this figure only represents the cost
of “saving” a single company. It is chilling to imagine how much will
be wasted in the effort to save the whole economy.

Thus does Stiglitz's call to entrust the politicians with another
large pile of money to “invest” on our behalf betray a disconnect from
reality. Politicians almost always spend wastefully, in ways they
think will further their own interests and electoral prospects. There
is no better illustration of this than the last stimulus bill put
together by Obama and his allies in Congress, which was nothing more
than a taxpayer-sponsored giveaway to favored Democratic
constituencies. Here are some items from it:

•Grants to fund arts projects in non-profit sector - $50 million
•Grants to rehabilitate and improve energy efficiency on Native
American housing programs - $510 million
•Funds for building and rehabilitating low-income housing using green
technology - $2.2 billion
•Grants for special education programs - $12.2 billion
•Indian Health Services IT development and deployment - $85 million
•Funding for 'Title I' education programs for disadvantaged children -
$13 billion
•Extra money for AmeriCorps volunteer programs - $160 million
•Extra money for Office of the National Coordinator for Health
Information Technology - $2 billion
•Head Start" programs for low-income preschoolers - $1 billion
•Grants to states for childcare services for low-income working
parents - $2 billion
How the above will stimulate the economy is unclear. Not that this
seems to matter to the defenders of the administration’s fiscal
policies, who increasingly use fear to make their point. If we don't
spend, this argument runs, the economy is going to be weaker, our tax
revenues are going to be lower, and we'll have a deficit, anyway.

This claim, too, is perfectly nonsensical. Deficits occur when the
government spends more than it takes in. As such, deficits result from
the kind of overspending that took place as a result of the stimulus.
If the government stops its fiscal excesses, there will be no more
budget shortfalls.

To illustrate, consider that this year the federal government will
post a budget shortfall of some $2 trillion. This is because it will
spend $4 trillion, but it will have only have collected $2 trillion in
revenues. The $2 trillion gap is the deficit. To close that gap it has
to borrow – or print – money.

Implicitly, at least, even the administration’s most ardent supporters
seem to understand that the spending spree cannot go on forever.
Speaking about Americans’ spending habits, Joseph Stiglitz observed
that the “problem is the United States, we're spending beyond its
means. And the savings rate was zero. The fact is that means we're
going to have to increase our savings rate to bring it into a more
sustainable level.”

The professor obviously recognizes the imprudence of living beyond
one's means when it comes to the American people, yet he refuses to
hold the federal government to the same standard. But why should the
government be absolved of the responsibility and spending restraint
that Stiglitz counsels for the country at large? No over-indebted
government in history has ever ended up well. If it stays on its
current course, America will be no exception.

FrontPageMagazine.com | Tuesday, August 11, 2009


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