After Addiction to the Drug Called Government Spending

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National DebtGovernment is like a marriage. You can deal with it or do without it. This is especially true if your political leanings are to the right — in which case, you can’t deal with it. On the other side, if you’re a loyal Obama Democrat, you just can’t get enough. If you’re like me, you try to ignore government in the vain hope that it just goes away.

One thing we can all agree on is government spending is completely out of control. The Federal debt of $17 trillion is ridiculous. The Social Security debt — our hidden debt — is more than twice this level. I have intentionally left out stuff like personal credit card debt, because that is a drug of a different category.

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If you’re a devotee of Rep. Paul Ryan and other Republicans, your solution is simple: cut tax rates (on the rich who don’t need more money and will spend only a nickel of any tax cut). True, this will increase the debt, but it will stimulate contributions to your next election campaign. And there is an outside chance, albeit slim, that the economy will benefit. Bon chance, ami.

If you’re an Obama devotee, of course, your solution is the opposite, in the name of wealth equalization. I am no Obama apostle but I must admit that wealth equalization holds a certain appealing vibe for me. I don’t really need more money, I just like the idea of getting something for nothing. And if it comes out of the pocket of some bazillionaire, that’s even better.

Since we’re about to embark on a big Congressional election campaign after Labor Day, we can expect to hear a nauseating repetition of these themes in the weeks and months ahead. Can’t wait to see intelligent men and women disintegrate into babbling talking points as they speak in hyperbolic, theoretical terms about red, white and blue outcomes.

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But wait. We actually have some real data to provide us with real paths forward. Neil Irwin, a young scribe with the New York Times, recently wrote a piece under the subject “A Recovery In Need of a Recovery.” We start with an economy in the fifth year of its recovery from the Great Recession. The U.S., he writes,

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…is still producing around $800 billion a year less in goods and services than it would if the economy were at full health, and as a result millions of people aren’t working who would be if conditions were better.

 

But why? Where is this gap coming from? To get at an answer, we needed a more basic question: What would the economy look like right now if it were fully healthy, and how is the actual reality of the economy right now different from that?

Unemployment, Irwin notes, has fallen from ridiculous levels to merely being embarrassingly high. White-collar jobs are rising even faster than employment as a whole in places like California. The crowning achievement? Gross domestic product (GDP) for the second quarter of 2014 grew at a sizable 4 percent annual rate. That’s a full percent above what analysts had forecast. Whoopee! Even taking out the benefits of a whopping increase in business inventories, it’s still a pretty decent figure.

But before you yell “Whoopee!” too loud, Irwin — with the help of the Congressional Budget Office (CBO) — points out the five major economic sectors that are keeping the U.S. $800 billion behind full-steam-ahead. Three of these sectors are residential housing; business fixed investment (factories, offices and equipment); and durable goods consumption (if you can’t afford a new house, you don’t need lots of new furniture). But the biggest reason why, according to the CBO, our economy isn’t chugging along more robustly is $357.9 billion less in federal, state and local government spending. Hear that loud and clear, Rep. Ryan?

We are now in the second year of the so-called “budget sequestration” aimed at cutting federal spending — $80 billion last year, $109 billion in 2014. And with much fanfare, the results are beginning to be measured. It’s still true, with respect to Rep, Ryan, that the U.S. can ill afford amassing debt at the rate of the past. But the question of what source of economic growth will replace government spending has yet to be asked or answered. Clearly business investment and housing won’t make up the difference.

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From the experience of the last decade, we know the housing market offers only limited hope: banks remain reluctant lenders; house prices in many parts of the country remain high; and white-collar job-creation is still weak overall. What’s clearly missing, then, is business fixed investment. To change this, several ingredients are needed, beyond obvious elements like end-consumer demand and affordable labor. One is confidence; another is capital. And that takes us back to the huge store of capital resting in offshore corporate accounts. U.S. corporations are hiding behind “shareholder responsibility” to minimize costs of all kinds, including taxes. CFOs have become experts at creating every diversion, merger, subsidiary, financial corporation in low- or zero-tax locations. When you hear in the news about “inversions,” that’s what this means.

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The solutions are simple, yet nearly impossible politically. One proposal is a one-time tax holiday on U.S. corporate cash holdings abroad. Or it could be done with the pounding of a gavel and the stroke of a pen. But as long as this country has a dysfunctional legislative body and a totally inflexible executive branch (not to mention one mistrusted by the business community), the likelihood of change is low.

The upcoming election may alter the political landscape, but it is doubtful that it will result in a return of confidence from the business community. That would require a complete metamorphosis from President Obama, unlikely in the final two years of his administration, or a changing of the guard in January 2017.

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Meantime, the economy is in recovery. But perhaps not so much a recovery from the Great Recession as from the drug of government spending.