A Stimulus to Bury our Kids in Debt

With the credit crisis crippling the global economy, governments are spending like drunken sailors to stabilize the financial system and spur growth once again using Keynesian policies. The United States especially has approved a giant fiscal stimulus, tax cuts and bail-outs that is increasing public debt. The crisis demand action but the problem is that (see IMF chart above) that government debt of rich countries is set to grow from 83.3% of GDP in 2008 to almost 100% in 2010. With aging populations and costly entitlements system these action may spell disaster. In addition while politicians talk about crisis and the majority of economists support the stimulus, some economists are against because government is not able to spend a dollar in a way that it generates a dollar or more in value. In addition for every dollar that the government takes out of the private sector is a dollar the private sector doesn’t have to spend anymore. The key problem here is that in order to finance all this spending, the government has either to raise taxes or print more money which creates inflation and can cause great harm to the average consumer and will place a huge burden on future generations. In other words, new president, same spending policies designed to bury our kids in debt. [On this subject see Stossel's video on Bailouts]

Pay up so Government can save you

As the credit crisis has pushed economies on the verge of recession or worse, governments have run to their rescue by announcing global bailout plans like drunken sailors. Britain led the way announcing sweeping semi-nationalization of the banking industry but the US has now outdone it announcing in the last 2 months over $1.5 in loans and investments to shore up its banking sector and buy toxic loans. The goal is to restore trust in the financial system, an essential element in a highly leveraged economy where faith in promises of paying back debts has virtually disappeared. The study of past economic depressions clearly shows that the early intervention of government is vital to stave off disaster but, especially in the midst of a presidential election, Americans are being told that more government intervention in the long, not only short, term will solve all sorts of problems: from anemic economic growth to energy independence, from health coverage to saving American jobs, etc. Never mind that government itself heavily contributed to creating this mess in the first place and  that government is already sowing the seeds of the next crisis. The US government’s debts have ballooned so extensively that the National Debt Clock in New York ran out of digits as the national debt level passed the $10 trillion point last month (note that when the clock was erected in 1989 debt was ‘only’ $2.7 trillion), a figure that amounts to $86k per family which is nearly double the average household income of an American family. Just as investors have lost confidence in the ability of companies to repay debts in this economy, the day will come when they will lose faith in the ability of American government to repay its own debt. The reality is that while politicians promise more public spending, the US government will soon mounting face pressure to reduce outlays and raise taxes to balance its books. What is scary is that Washington politicians are also unwilling to deal with another looming disaster of the big entitlement programs like Social Security and Medicaid whose costs will rise as the baby boomers retire. This situation combined with the silly claims that this financial crisis was created by deregulation (even taking accounting for Wall street’s greed, just look at how many federal and state agencies had oversight authority the financial industry or the market distortions introduced by Fannie Mae and Freddie Mac) will lead to bigger government. This is a trend that began with the last great depression and has led to the uncontrolled growth of the US federal government (federal debt has continued to increase both under Democratic and Republican administrations and congresses). Americans will pay dearly for their addiction to debt and their inability to stop public spending and unless they rediscover their founding fathers’ preference for limited government they can look forward to higher taxes, lower growth and the great diminishing of American power.