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 sheet, 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 sheet. 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.