Government Spending: Really The Issue?

As I write this blog, the stock market is in free fall, reeling from last week’s S&P downgrade of America’s credit rating from AAA to AA+. Today, another punch to the gut as Standard & Poor’s has added Fannie Mae and Freddie Mac to the downgrade list.

What does it all mean?

The S&P claimed their decision was based more on the political bickering that preceded the raising of the debt limit than on the deficit itself. The rationale was that this current political climate-extreme polarization—leads to the feeling that our system is dysfunctional (anyone disagree?) and that depressing reality simply overshadowed the numbers themselves.

The crux of the argument is based on two assumptions:

1) President Obama and the Democrats believe in more government and, conversely,
2) Republicans believe in less government.

It could be that this oversimplification is unjustified.

Since everyone hates taxes and feels (perhaps justifiably so) that politicians of any party tend to squander our tax dollars, the fewer taxes we send to Uncle Sam, the better. Plus, an ailing economy requires less taxation in order to stimulate the consumer spending that we equate with a robust economy.

All of this makes sense, which is why ( I think) the Tea Party has gained so much traction in our political discourse. Rep. Ron Paul has openly said that maybe a complete default is the medicine we need to provide the necessary “correction”. He may indeed be right, but no one wants to experience the pain, havoc and social upheaval that a default would promise.

When I ask conservatives exactly WHAT was it that pulled America out of the Great Depression, I get one definitive answer:

“World War II.”

When I probe deeper and ask what EXACTLY about World War II caused the United States to rebound from the Depression, again I get a similar response:

“The war put America back to work, building planes and tanks and implements of war”

I then set the trap. Exactly WHO paid for all of this?

Oops.

The U.S. Government.

So, “World War II was essentially a very costly government stimulus program, no?”—I ask them.

Crickets.

There is no “less government is better” response that doesn’t paint them into a hypocritical corner.

Although you’ll never hear this from a Republican leader heading into an election year, experts from both parties and throughout the economic sector have agreed in the past that there is very little the President (any President) can do to turn an economy around.

Until the recent debt crisis, the stock market was flourishing---does Obama deserve some credit for that? Probably not. But then, he cannot bear the blame when, in an economy that's producing record profits, those companies seeing the windfall have decided not to hire additional workers and expand.

Why is that?

Credit/short term paper for businesses has never been cheaper. Expand, grow and reap ever greater revenues. Why not? But that’s not happening. What’s a Chief Executive to do?

While Ben Bernanke has many critics, it should be duly noted that, despite his policies’ attachment to the Obama Administration,

1) He was Bush’s man, not Obama’s and
2) His management of the Fed is not based on politics.

The best politics for any party is economic health and vitality. Whatever it takes to get there will be the course taken, regardless of who is in office. Treasury Secretary Tim Geithner is not a raging liberal. He’s a Wall Street guy. The same for the departed Larry Summers. Their heads are wrapped around performance and stability, not who is projected to be re-elected.

Bernanke is well regarded as a student of and an expert on the Great Depression. There is considerable evidence to suggest that massive government spending in the SHORT TERM (and this is key-short term) can help avoid the severe downturns. In fact, Bernanke will state that the Great Depression was easing because of FDR’s programs until political opposition created an environment where further stimulus became politically impossible (sound familiar?)

As a result, the country, instead of recovering, plunged into a deeper hole-a true Depression—until the unavoidable government stimulus (WWII) gave us the sustained boost that created a generation of unprecedented growth and affluence.

The emergence of the middle class was key to this success. Today, the middle class is evaporating—as more people fall either below the poverty line—or, conversely, they rise to the ultra-rich stratosphere, where the Bush tax cuts can protect them further.

We, as a nation, are INSANE.

We need to scrap the U.S. tax code and start from scratch. Since the political landscape cannot allow Congress to be in charge of overseeing this gargantuan task, I think that we should sequester the very best economic brains in an effort to come up with a plan for the future.

Economic Marshall Law, if you will. Bretton Woods, 2011. Give the lawmakers political cover by agreeing to the legislative equivalent of mediation. A “disinterested” third party (this blue-ribbon commission of the best and brightest economic minds) would return to Congress a comprehensive blueprint.

Congress would then be compelled to vote on it—up or down, no amendments, no revisions and zero arm-twisting by special interests.

A fair tax system—personal income tax, corporate income tax and all other forms of revenue—need to be administered fairly and across all spectrums of income.

We need the revenue to run the government. We need government investment, especially in the area of energy—to be able to lead the world in this century as we have in the last. The interstate highway system---in the Republican Eisenhower Administration—was a HUGE government program—but it created massive employment and spurred the transportation of goods that we still benefit from today.

I don’t trust the politicians to solve our problems. A narrow ideological agenda (like that of the Tea Party) leads to a belief that growth comes only from lowering taxes. The Bush tax cuts were designed to boost the economy by leading to investment and spending.

OK, we tried it.

Let’s move on and develop a new system that gives the government the revenue it needs-but let’s make a system where fairness and equitable shared burden is the hallmark.

That’s not the case now.


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