Is Uncle Sam Investing Wisely?

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Government spending in the age of new austerity.

It was a little more than 10 years ago when the economic expansion seemed limitless and the federal government had a balanced budget, with projected surpluses for years to come. The big question in those halcyon days was whether to let government “keep” the money or return it to the people.

The answer came by way of the ballot box: George W. Bush was elected president and, as one of his first acts, he and the new Congress enacted one of the largest tax cuts — and refunds — in U.S. history.

The opposition argued to keep the money and use it to pay down existing, unfunded commitments like Social Security or Medicare. Instead, we chose to have the money transferred back to us so we could save it for a rainy day or plan for our retirement.

While it was nice to get a check, and it did help many people, history will ultimately decide whether it was the right decision.

We are facing a similar problem now, but on the flipside. We have tepid economic growth, an enormous budget deficit and ever-expanding debt projections. We are fighting two (or more) wars and have expanded the country’s social welfare commitments in the form of Medicare Part B and Health Care Reform.

Should we raise taxes, in effect taking some of that refund back? Should we force Washington to spend less?

Looking back on the thinking of the Bush-era tax cuts, the money refunded to people should’ve blossomed into further savings. Even $500 over the course of 10 years, at an average rate of return (approximately 7 percent), would be nearly $1,000 now.

It would certainly be helpful if Washington could have some of that money back to help cover its expenditures.

The problem is most people didn’t save their money. And, even if they did, this country is still emerging from a near-unparalleled economic crisis that stretched, broke and re-broke many budgets.

Having the government reduce its spending seems like a good idea in the long term, right? Expenditures should match revenue. Unfortunately, many companies and individuals have come to rely on that money, including — but not limited to — defense contractors, social service recipients and corporations that benefit from incentives, protection and tax policy.

Shake up those sectors and people feel less safe, not safer. When that’s the case, people are less likely to spend. Companies put contracts on hold or scale back on research and development. Truth is, in a crisis such as this, when the fundamental structure of the economy gets challenged, only the government can provide the type of fail-safes (i.e. money) able to keep the economy humming.

Granted, companies and people are the principal drivers of the economy; they, more than the government, create the jobs and supply the innovation. But, without the government providing an environment where companies and people can operate relatively unburdened by access to energy, infrastructure and security, our economy would resemble the Third World, not the first. What about the massive debt and government’s insatiable appetite to spend, regardless of whether it has money or not?

We live in an economy based largely on risk capital.  Venture capital powers start-ups with world-changing ideas. Private equity backs companies that have shown significant promise in the marketplace. Mature companies have bank loans, the public debt markets or equity markets to fund expansion and innovative ideas.

When I think about the government’s debt, I look at it as risk capital being invested directly into the U.S. economy.  Nobody knows which dollar will generate the biggest buck, but I still believe that investing in the U.S. economy is a winner. And if our government doesn’t do it, who will? RT

Mark Phillips is an economist and former Wall Street analyst. He holds an M.S. in applied economics from the University of Michigan and a B.S. in economics and philosophy from the London School of Economics.

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