Sunday, December 16, 2012

Economic Growth Must Take Center Stage and Not Deficit Reduction ... Only Growth Will Stop the Deficits and National Debt from Growing Exponentially ... That's Just the Way It Is

With all the noise coming out of Washington about the fiscal cliff, raising taxes on the rich and the need for reducing government spending, including spending on entitlements, it's a good time to try to clear the air.

We need substantial economic growth, and that growth can only be led by the private sector. Otherwise our financial problems won't be solved. It's that simple.

Accordingly, without sufficient private sector led economic growth which will cause a substantial decline in the unemployment rate over time, the politicians really are just playing to the crowd and making lots of noise.

However, if as a nation we place an intense focus on economic growth, our current problems, backed by some reasonable common sense based initiatives, will disappear, and we can resume being the America we've long been -- the land of individual political freedom and economic opportunity.

In other words, it's all about enabling future economic growth, pure and simple.

Putting the Brakes on Cutting the Deficit tells about the need for economic growth:

"With all the haggling over tax increases and spending cuts to avert the fiscal cliff, is it possible the federal budget deficit is shrinking too fast?

The question is jarring. The deficit, when measured against the size of the U.S. economy, has been bigger in each of the past three years than in any year since 1945. Total federal debt is above $16 trillion and brushing up against the congressionally set ceiling. Even under optimistic economic forecasts, the debt burden will grow without a change in tax and spending trends.


The deficit—the difference between government revenue and spending—is shrinking even before the year-end fiscal cliff or a last-minute compromise to avoid it. In the depths of the most recent recession, the fiscal year that ended Sept. 30, 2009, the deficit was 10.1% of gross domestic product, the value of all the goods and services produced. Since then, the deficit has declined to 9% of GDP in 2010, 8.7% in 2011 and 7.0% in fiscal 2012. Private analysts predict the deficit will be between 5.5% and 6.0% of GDP in fiscal 2013, depending on the outcome of the budget talks.

One reason the deficit is still large is that the economy is still lousy: More unemployment means fewer taxpayers as well as more government spending on jobless benefits, food stamps and the like. As the economy slowly improves, the deficit shrinks as these automatic stabilizers, as they're known, adjust. Tax revenue rises. Safety-net spending falls. . . .

To gauge the impact of fiscal policy, economists estimate what the budget deficit would be if the U.S. were at close to full employment and if the unemployment rate were around 5.4%. In budget geeks' nirvana, the "cyclically adjusted" deficit should be close to zero when the economy is firing on all cylinders. Though healing, the U.S. economy remains far from healthy. At 7.7%, unemployment is roughly where it was at the depths of the 1990-91 recession and well above its peak during the 2001 recession.

The "structural" measure of the deficit has been coming down, too. It fell by about 1.3 percentage points of GDP in 2012, or roughly by $200 billion. It isn't only the improving economy that is automatically reducing the deficit, it is the retreat in federal stimulus spending and cuts by state and local governments. After the huge fiscal stimulus of a few years ago which offset the contraction in consumer and business demand, government has gone into reverse: It now is a drag on growth, and that is likely to continue in 2013. . . .

So, the faster the deficit shrinks, the better, right? Not necessarily. . . .
But consider the U.S. economy at the end of 2012. The U.S. Treasury, for now, is borrowing hundreds of billions of dollars at rock-bottom interest rates. There is no pressure from markets for immediate deficit reduction. The U.S. economy has been and is expected to grow at a painfully slow pace. Four months ago, forecasters surveyed by The Wall Street Journal expected the economy would expand by 2.5% over the four quarters of 2013. This week, they are predicting 2.3%—and they expect unemployment to be above 7% until mid-2014, as are Federal Reserve officials in their latest forecast. . . .

Federal budget deficits do threaten American prosperity—tomorrow. Waiting until tomorrow to enact laws to change benefits so their costs rise more slowly and to alter the tax code so it brings in more revenue would be imprudent. But an overdose of instant austerity would be, too."

Summing Up

The point is simple, albeit perhaps not politically palatable.

We need growth and we don't need to implement austerity measures anytime soon.

That said, we do need a plan which will bring government expenditures for things such as Medicare, Medicaid, ObamaCare and Social Security into the affordability range over time.

We don't need to cut ACTUAL spending now (actual spending not to be confused with what the government calls baseline adjusted spending levels), but we do need a firm bipartisan agreement to fix the problems associated with the affordability of these programs as the economy heals.

In the long term, the cost of medical care is the biggie. Without a solution in that area, we won't be able to solve our financial problems as a nation.

But if We the People through our elected representatives resolve to live within our means and actually take steps to address the health care and related affordability issues realistically, we will fix our fiscal problems.

And more importantly, if our politicians stop passively discouraging and begin actively encouraging the private sector leadership to take aggressive steps to grow the U.S. economy over time, our nation's economic issues will quickly begin to fade.

Without that economic growth, however, we're just going to keep spinning our wheels. And that's one thing we really can't "afford" to do.

The Fed has done its part with monetary policy, and maybe even too much, but now it's out of ammo.

It's time for appropriate action from our public servants in the Congress and the White House. 

I may be crazy, but I'm still betting on just that. It's just too serious for them to continue to ignore any longer.

All that said, get ready for some more political theater in the next couple of weeks. Then more again in 2013.

But that's the way legitimate self government works. Lots of debates and then appropriate political action in response to pressure for real and lasting affordable solutions from We the People.

Thanks. Bob. 

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