Has anyone ever wondered if it is possible that one can land in a financial crisis when one has a steady income, no debts, and a large reserve of money in case of emergencies? Certainly, I suppose, if something devastating comes around, like an accident that requires weeks in the ICU, surgeries, and a long rehabilitation, that could bankrupt a person. Yet such accidents, on a whole, are rare, and most people who live a financially responsible life never have to plead for a bailout.
When we look at our current financial crisis nationwide, I can’t help but wonder what people are thinking. President Obama has promised us trillion dollar deficits for years to come in an effort to restore our economy. Like most right-leaning folk, I’m under the impression that our current crisis has come from overspending, living beyond our means, and not being prepared for when we hit bumpy times in the economy (like $4/gallon gas, which drives prices up all around). Perhaps, if this view is incorrect, someone will be willing to explain to me why it is so. But my impression has been that first, people individually are consumed with buying, buying, buying, even when they don’t have the money to buy. I have friends who, though they grossed over $60,000 a year, were still living paycheck to paycheck because of their deficit spending. I’ve seen people who, upon receiving their government money, have gone and blown it on new cell phones (that are shut down after two delinquent months), on fancy steack dinners, and so on, instead of buying necessities or saving up what they can. I’ve seen people struggling with hundreds of thousands of dollars of accumulated debt that came from student loans, house loans, car loans, credit cards, and so on. This is just what I’ve seen. What I’ve heard–word of mouth, or in the news, or on blogs–is even worse.
My impression on the nature of our economic downturn is that excessive debt and living beyond our means was primarily responsible, and not just at an individual level. Our leaders have trampled on our economy with the huge amount of deficit spending required to run two wars, to fund huge expansions of entitlement, and most recently wasted billions upon billions of dollars on stimulus packages and bailout programs that simply didn’t work. Our dollar devalued in part because we have borrowed or printed so much money to make up for our deficit. True, to this point we’ve honored all our loans, but any economist knows that you can’t deficit spend forever. Eventually it catches up to you. And when our dollar devalued, prices rose. Prices also shot up because of high fuel costs, which ramified throughout an economy largely driven by the ability to ship vast quantities of products to remote locations. And when prices rose, people found the scant dollars they still possessed disappearing on those everday items that now they can’t really afford.
One could make an argument that the economic crash never would have occurred without the housing bubble. The high prices proved to be the needle that pricked the bubble. Too many people, threatened by a slowing housing market (a market that was finally reaching an equilibrium, and not necessarily downturning), foreclosed on their homes in such a short succession that banks could not recoup their losses. Sometimes those losses were so extreme that the banks themselves went under. And yet, one could argue that none of this needed to have happened, if only so many people didn’t take out risky loans that they really couldn’t afford. Without the housing bubble bursting, we might have just seen a period of stagnant growth, or maybe a slow downturn in the economy, as opposed to an economic crisis.
Our solution to this economic disaster leaves me dismayed and a little angry. Because of our government’s deficit spending, it had no money on hand to aid those it felt it had to aid. So instead of turning people away, saying “Sorry, we’re just as broke as you are”, our government promised money it didn’t have. At that point it had three option: borrow money, which would in turn work to continue devaluing the dollar; print money, which would devalue the dollar further; or to tax citizens, which would slow the economy more. Now, I’m all for making sure that the needy receive those necessities they lack, but any of these options are just a form of “what one hand giveth, the other taketh away”. The government gives away money to those who need the money, but in the process–because it has to scrounge up this money from lenders, from the rich, or invent it out of thin air–it makes that money worth less than it was, or damages job growth, to the end effect of making the situation even worse than it was before.
Do I think that the bailout this past fall was necessary? Perhaps. With very myopic hindsight, it was necessary, because I’ll agree that the hemorraging of the economy required at least a tournequet. But if we look even further back, we’ll see that because the government didn’t do as every financially prudent family does–i.e. put some money aside against some unforeseen crisis–the government ultimately just continued the downward spiral with the bailout. Now we’re even further in debt, and it is only by the “fortune” that almost every other major economic partner out there is also reeling that our dollar hasn’t sunk even lower. And while we can argue matters would have been much worse without the bailout, the fact of the matter still remains. Things could have been much better had our government planned ahead and had a reserve to draw from.
As an aside, Wyoming experienced a major bust in the early 1980’s due to changing energy factors. For years prior, Wyoming’s oil was a major source of revenue, and oil fields contined to expand throughout the state. Well, post-Carter, our nation recovered from its oil problems, the price of oil dropped, the interest in domestic oil waned, and soon Wyoming was left hanging. So the state debated, and eventually, once its economy recovered and its new great export (coal) starting bringing in vast amounts of revenue, it was decided to make a reserve in case of future energy busts. Currently, Wyoming’s planning has been smart enough that even now, we’re only just considering making a few slight budget cuts so that we come in under budget. Our nation at large could learn a lesson, here.
The unfortunate thing is: we’re not learning the lesson. We now have from our President practically a promise that unbridled deficit spending will continue unencumbered through his administration. No problem is so small that the government won’t fling millions of dollars it does not have at it. Far from seeing a government that is turning the tides of the reckless spending characteristic of the Bush Administration, far from seeing a government put pet projects aside and truly work to end the debts and deficit spending that have nearly ruined us, we see a government that is plunging headfirst into even worse folly.
This stimulus package is not going to work. All the money earmarked, which I detailed in my previous post, is not really geared towards helping the economy as a whole. If you study it closely, you’ll realize that most of that money is being distributed to various governmental offices (some of which don’t even exist yet). Some of it will trickle down, of course. Spending on roads is helpful. Even though the Department of Transportation–which oversees all road projects–is a governmental agency, it hires and pays the private construction crews that do the hard labor. But most of the rest of the money essentially becomes salary for government positions. And that salaray won’t last indefinitely; in a couple of years’ time (since this money is to be spent over 2009 and 2010), we’ll need a new package to pay for all these governmental positions.
Sure, jobs (governmental ones, anyway) could be created through this package. But those jobs will be lost unless another vast swath of money is set aside to maintain them. That will probably end up being another $365 billion down the drains, $365 billion we don’t have to spend. This is probably where Obama is getting his projected “trillion dollar deficits for years to come”.
If the government wants to fix our economic problem, as opposed to making temporary patches that score political points but do little in the long run, it needs to balance the budget and pay off its huge debt. Once that debt is gone, it can then offer further aid from any surplus that comes from having a properly balanced budget.
Far be it for me to criticize President Obama (I’ll leave that others), but what he needs to realize is that you can’t fix the problem with more of the problem. It hurts, I know, to step back and deny people who are honestly in need and were depending on the government to make good on its promises. It is difficult to turn away from political expediency to do what is right, to do what must be done, because what must be done is very rarely popular. But we’ve had decades in which the prevailing politics were self-centered, focuses on entitlements for political points, and paying lip service to ideals in order to get elected, only to abandon those ideals once in power. The Republican Party self-destructed by betraying its promises made through Contract with America; John McCain lost his bid for presidency in part because too many people felt he was only talking the talk, and wouldn’t walk the walk. Our new Democratic majority, which took power in 2006, paved its way with promises that it then reneged on, and now suffers from anemic approval ratings. President Obama campaigned on hope and change, to do away with the old politics and usher in a new era. The only way he can make good on that promise to do away with the playing for political points and petty power grabs, and so far, he as demonstrated only the same petty bickering and power plays we’ve come to expect from our elected officials.
It seems that the current stimulus package will pass the Senate here shortly, and that by the end of the week all the discrepancies with the House bill will be ironed out. That’s another $830 billion dollars spent that will have little economic impact other than maybe keeping various government employees employed for another two years. Already we’re talking of appropriating another $100 billion from the TARP funds to try, once again, to unlock frozen credit. There’s also talk of crafting a new package, apart from the current stimulus bill, that will give tax-paying families (among others) $500-$1000 of tax-payers money in order to help stimulate the economy. Then there’s the already-bloated budget for the year, and who knows what else down the road. I predict, though, that we’ll see call for more massive spending by June, if not earlier, and that many of the corporations that came with doggie bags, pleading for handouts this past fall, will be back this fall for more money. The cycle will continue until either our nation reaches a point of no return (I don’t believe we’re there yet, but if we start seeing exponential growth in our deficit, we’ll be there), or someone finally says “No more. We can’t keep spending like this. We have to return to fiscal responsibility, pay off our debts, and then see what we can do within our means.”
Perhaps I’m just pessimistic, but I don’t see that happening any time soon.
Update: As of this morning, the Senate has passed the stimulus bill 61-37. It now goes before a joint conference between the House and Senate to iron out the details.