The Economic Elephant in the Room
Everyone is talking about the economy so I see no reason not to voice my inexpert opinion since obviously our politicians have no more of a clue about how to fix this than I do. Whether that’s because economic experts can’t agree, the politicians aren’t listening to them, or because our elected officials are too busy playing dogmatic partisan politics and have lost whatever tenuous hold on reality they may have once had, I don’t know. I’d love to say I don’t care but I do because they, sadly, hold our nation’s future in their hands.
I’m beginning to suspect there may be something wrong with our system, which seems to frequently place incompetent ideologues in positions of political power. Sometimes I think those seeking political office should have to pass some kind of test on basic intelligence, law, history, science, and the Constitution before they can run. Look at C-SPAN sometime and see if you don’t agree. But this is extremely unlikely since I can think of no one objective and trustworthy enough to develop and score the tests and, of course, those in power now would have to pass a Constitutional amendment to require them. This isn’t going to happen. All any of us can do now is try to understand what might be going wrong with the economy so we can at least say we saw the license plate of the truck that hit us. So, for what it’s worth, I’m going to take a shot at it using some basic fundamental principles that are simple enough for even an amateur philosopher to understand.
1) Spending: If you make less, you must spend less. If you make more, you can spend more. Putting it another way, you have to pay for what you buy. Like I tell my kids, if you can’t afford it, don’t buy it. Never spend money you don’t have to buy stuff you don’t need and don’t use credit unless it’s for a critical investment (like a house) or an emergency – a REAL emergency (we’re talking ambulances and hospitals here or maybe a car repair, not new shoes or a latte at Starbucks).
I know this philosophy doesn’t actually extend beyond personal finances to governments but I think there must be similarities. It seems our elected representatives in Washington don’t agree.
As a starting out point, let’s look at US federal government expenditures since 1980.
US Federal Government Spending:
Clearly spending has been going up. This doesn’t surprise or outrage me though because at the same time the population has gone up from 229 million in 1980 to 309 million in 2011, and the Gross Domestic Product, which is the estimated sum of all the goods and services produced in the country, has risen as well. Providing essential governmental services to more people producing more things will, quite logically, cost more. There is no big surprise here although I do have to wonder why expenditures have gone up more steeply than either population or GDP. The table below shows how the GDP has more than doubled since 1980.
2) Income: The second part of the equation is income. Unlike us puny mortals who must rely on our own competence, luck, and the largess of our employers, to determine our incomes, the government can pretty much decide how much it makes by adjusting taxes. As with spending, I would expect tax revenues to go up with the population and the GDP. Surprisingly, they don’t.
US Federal Government Revenues:
There is a big dip (no pun intended) after 2001 even though there is no corresponding dip in either GDP or expenditures. Population, GDP, and expenditures all continued to grow while at the same time the government chose – yes chose – to take in less. I will assume this was a result of tax breaks but if those were intended to spur the economy and increase GDP, they don’t seem to have had much, if any, effect. The rate of GDP growth actually appears to have slowed slightly after the decrease in federal revenues. I don’t know if there is any cause and effect relationship here. What is clear though is that decreased taxes had no noticeable effect on increasing the GDP.
Now a quick comparison of revenues and expenses as a percentage of GDP in the chart below shows that starting in 1998, the US seemed to be getting its fiscal house in order. It was actually taking in more than it was spending. This is the enviable position a lot of families would love to be in right now; one in which there is extra income to pay down their debt, make some overdue repairs, and maybe even invest in the future by starting a business or sending a family member to college. I would think this condition would offer similar opportunities for the government. Unfortunately, it didn’t last long. After 2001, you can again see how federal revenues (this time as a percentage of GDP) dived while expenditures once again started to climb.
3) Debt: After 2001, the U.S. Government made at least two seemingly real stupid economic choices; it chose to spend more and it chose to earn less. The only way to do this is to borrow more money, so it did. It borrowed from its own citizens as well as from other countries, and, I think, from our future as well. Today over 12% of what the US government spends (some of which is more borrowed money), is spent on interest. Think about that. More than twelve cents out of every dollar the government spends goes not to protecting American citizens or modernizing the infrastructure to help people conduct business or move products. It does not go to education so our children can successfully compete in a global economy or help old or sick Americans who have already done what they could. It is not available to create jobs or help Americans seeking work so that they too can provide for their families and help grow the country. It pays for poor choices of politicians who failed to realize that there is a cost to fiscal irresponsibility.
You can’t keep doing that and as much as I think some of the Tea Partiers are about as screwy as you can get, they’re right about that at a very basic level. They’re wrong at another fundamental level however. Just reducing government spending does not solve the problem. Actually it is exactly the opposite of what needs to be done because the problem isn’t the debt, it’s the economy. The debt is like a knife in our chest but pull it out too quickly and we’ll bleed to death.
4) The Economy: The nation’s economy is driven by spending. When all is said and done, that’s what the economy is – people exchanging money. If you take out piracy, theft, plunder, tribute, and other time tested but (hopefully) outdated ways of bringing in capital, this means that goods and services must be produced and sold, either domestically or to other countries. The trouble is that consumer spending is currently down. People are tightening their belts. Median houshold income adjusted for inflation has gone up only about 3% in the last thirty years and may now be declining, unemployment is relatively high, and many people are already seriously in debt. Average citizens are apparently just a bit brighter than the average politician because they know they can’t keep spending more than they make.
This has a domino effect. With consumer spending down, businesses produce less because of the lower demand for their goods or services. They hire fewer people or perhaps layoff current workers. This increases unemployment, further reducing consumer spending, and things can spiral down from there until something happens that leads to renewed spending. Neither private companies nor multinational corporations are likely to hire workers to provide services or to produce products for which they see insufficient demand and no amount of tax breaks or government subsides will encourage them to do so.
But if American consumers aren’t spending, who can? Well, people in other countries, and we do sell a lot of stuff abroad. But the rest of the world (for the most part) is having economic problems as well. Even China, which I believe holds about 8% of the American debt, probably can’t provide the market we need. Yes, they have a lot of capital and we sell them a lot of debt but our trade balance with them currently tilts heavily the other way. I’m sure they consider our debt a good investment and are happy with the reliable interest payments we make to them but they produce most of the things they need themselves and are planning on producing more consumer goods for domestic consumption so I wouldn’t look to exports to jumpstart the American economy.
It’s at times like these that governments should step in and spend, whether that’s on the military, the infrastructure, tuition grants, research, or direct government employment matters but it matters less than actually creating jobs and encouraging consumer spending. This is the kind of emergency that governments should, if necessary, borrow money for. Unfortunately political decisions from at least 2001 have already left the government deeply in debt and there is a lot of political pressure to reduce borrowing.
What does that leave? Well, the richest Americans – those making $380,000 or more annually – have seen their incomes grow 33% over the last 20 years. They have benefited out of proportion to average Americans because of past fiscal policies so it seems only fair to me that they be approached now to help. Tax breaks for the wealthy must be allowed to expire, unnecessary subsides to corporations must be eliminated, tax loopholes must be closed.
Decreasing government spending is exactly the wrong thing to do at times like this. Money needs to be spent by someone and it seems as if government is the only entity that can do that now sufficiently to spur the economy. The government is a very potent job creator. Government purchases and contracts with private companies for services for everything from office maintenance to military logistical support provide employment for many. The government needs to increase its revenues and it must spend that money domestically. It will still take a long time to recover, but if this money is spent wisely on things that further contribute to economic expansion we can succeed.
Anyway, that’s how I see it. Disagree if you wish. Speech is still free. Most everything else costs money.