Wednesday, July 20, 2011

Economic Growth is Job #1

Economic growth is the single biggest long term issue facing America. It's absolutely Job #1.

That said, neither political party appears to be focused on growth as the single most important problem we're facing. In our current environment, the debt ceiling talks have taken center stage. Hopefully, we'll get to the end of that discussion soon, and we can then get genuinely serious about the goal of growing our economy and what it will take to do so. Focusing America on Job #1 can't happen soon enough.

Democrats act as if they believe there's an ever flowing private sector money tree which will spew forth abundant tax revenues. According to their playbook, all we have to do is "stimulate" the economy with enough government spending. This quick fix but ineffective Keynesian deficit spending approach simply doesn't work. Meanwhile, Republicans act as if reducing government spending alone will somehow solve the growth problem and balance the budget at the same time. Neither party is even close to the truth.

Here's the real deal. The debt ceiling talks are a sideshow and growing our economy is THE fundamental issue facing America today. Along those lines, the ~$100 trillion in unfunded medicare and social security obligations (see yesterday's post) will prove to be largely empty promises, as will many other commitments we've made as a country, if our economy doesn't grow sufficiently in future years. Sustainable economic growth is the only money tree we have, have had or ever will have.

We need to get really serious about the things that will enhance the future well-being of both America and our fellow Americans. All of us must make a sincere effort to understand why the private sector needs constant nourishing and why risk takers who pursue business careers are patriots, too. In simple terms, we need to cause a business mentality to be adopted in the corridors of our nation's capitol. And if the existing politicians can't get with the grow America program, we need to elect some new ones.

Let's talk about transparency.

America's Debt-Ceiling Opportunity argues persuasively that a business-like accounting approach should be an integral part of any government budget debt ceiling deal. If it were, we'd be better able to see things as they really are. Getting to a better reality is always essential to problem solving, so knowing what's what is a necessary ingredient of our budding grow America effort.

If we come to know all about the ~$100 trillion unfunded benefit picture, our politicians will have to become knowledgeable in order to talk to us about it. {And the talk show hosts and the rest of the pundits will have to become knowledgeable as well. They already know how to talk.} Then we'll make some hard nosed and informed choices about what to do with entitlements. In sum, it's vitally important that we possess the required knowledge to make informed decisions as we transition from a "nice to have" to a "need to have" government system.

Now let's briefly cover the fundamental differences between government and business accounting, and why making the government adopt a business accounting system would make everything so much clearer for we the people with respect to entitlements and other related tradeoffs and choices. Redistribution and taxes are two sides of the same coin, so let's treat them as such.

Here's in part what "America's Debt-Ceiling Opportunity" has to say about government accounting transparency and informed choice: "One of the longstanding problems we have in understanding the nation's true fiscal picture is the government's arcane "cash basis" budget methodology. As "USA Inc." observes, government budgets only record long-term liabilities such as entitlements when they are paid, whereas corporations must reflect the net present value of liabilities as they occur. This leads to short-term distorted thinking --- citizens and politicians believe the country is in much better financial condition that it really is, and that it is therefore able to take on even more obligations." How true.

Accordingly, we can grasp the essence of the ~$100 trillion entitlements saga very simply. We've made promises to pay benefits, but we don't record the cost of that promise until after we've made the payment. That's nuts and would be analogous to an individual taking out a 30 year $200,000 home mortgage with required monthly payments of $1,000 but not accounting for the $200,000 obligation as a liability. Or in the case of entitlements, $100 trillion.

As we now know, being the accountants that we've become, ignoring the debt itself is exactly what the government does when it uses the cash basis accounting methodology. Much more realistically, the accrual method of accounting for private sector companies mandates that companies establish liabilities as they are promised. Companies then take steps to fund those liabilities over time, unlike our government.

If the government were to adopt the business sector's "accrual" method instead of the cash method of accounting for entitlement promises, our government debt problem would instantly multiply severalfold. We'd then be forced to acknowledge the extent of our total obligations, and we could either fund those obligations or alter the promised benefits for future retirees. Either way transparency would reign. Today government just ignores the issue, perhaps hoping it will go away or at least not rear its ugly head until a new group of politicians is in office and can blame the old gang. Funny how that political stuff works.

Unfortunately for the young people of today, the issue won't go away, and they'll be asked to pay someday. Either that or shove Granny off a cliff. In that case, I wonder who's really doing the shoving, but then the current politicians will be long out of office when the dreaded day of reckoning does arrive. Unless, of course, we decide to do the honorable thing, face the facts now and choose what to do for or to that distant future taxpayer and beneficiary, one way or another.

The central point we've argued, and which is also set forth in today's referenced article, is that driving sufficient future economic growth is job #1. To quote from the article, "If we sustain average growth in excess of 5% for the next decade, we would balance our budgets, obviating the need for a debt-ceiling debate. The challenge is achieving such a lofty target given that average growth for the past 40 years has been 2.83%, but it is a noble goal."

In my view, the 5% goal is indeed noble, but it's hardly realistic. In fact, and as you'll see below, the historical average of 2.83% doesn't appear all that easy either. The odds against achieving anything close to 5% growth anytime soon are staggering. That's almost an "impossible dream" for now. Why so, you ask?

Here's why job #1 has to be economic growth. We now have at least three genuinely large obstacles, or headwinds if you prefer, to returning anytime soon to ~3% real growth levels, let alone 5%. Each barrier to "normal" growth is big. Considering the three as a whole makes it really easy to see why economic growth must take center stage.

Both (1) individual and (2) government debt levels are so high that this will inhibit our ability to grow "normally". The recent and highly regarded book "This Time Is Different" concludes that after a debt induced bubble has burst (such as occurred with housing in 2007), growth is reduced by ~1% annually as the resumption to "normal" levels takes many years. Suffice it to say for now that people have been burned, are busy paying back debt and therefore reluctant and perhaps unable to spend on big ticket items (cars, houses, appliances and such) for a long time.

Beyond the bubble with housing in the private sector, the government piece of the economy has grown over time. We've copied Europe with our entitlement programs the past few decades. And if that's not enough, government debt will continue to grow as our deficits will continue for the foreseeable future. Government growth necessarily reduces private sector growth. That reduces overall economic growth, because all growth is not equal. One kind is good and the other kind is not so good. Guess which.

For all these reasons and more, receipts from taxes will be reduced substantially due to higher government spending resulting from lower than "normal" economic activity and higher than "normal" unemployment levels.

(3) Finally, and very importantly, we've lost many U.S. manufacturing and related jobs over the past twenty years, and without a workable plan to get these back, employment will suffer for many more years.

One, two, three. Historically high levels of individual debt, government debt and a loss of manufacturing competitiveness. We are stuck with all three growth inhibitors, unlike previous recessions.

If we are to get the economy growing again, we need to shrink the size of government relative to the private sector. That will require a restructuring of our government, its size, its expenditures and its programs. That's what private sector companies do, and that's what the public sector must learn to do, too.

We'll discuss this run it like we're serious about growth approach later.

Thanks. Bob.

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