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The Two Sides on the Debate Over Government Spending

Politics / Government Spending Mar 10, 2010 - 06:29 PM GMT

By: Tim_Iacono

Politics

Best Financial Markets Analysis ArticleWe live in interesting times, times that are no doubt going to get much more interesting in the years ahead and, unfortunately, probably more violent.

The recent demonstrations on California college campuses following the Tea Party protests of last summer bring up the intriguing possibility that we could actually see protesters againstgovernment spending and for government spending face off against each other in the streets.


Just the fact that people are protesting at all is probably a big step in the right direction as we've become a much too docile population over the last 20 years here in the U.S., but, multiple bursting asset bubbles and the realization by millions of parents all across the land that, for the first time in generations, the quality of life experienced by their children may pale in comparison to their own - all of this goes a long way in changing that.

The younger set seems to be pretty angry too.

Now, the little girl in the photo above probably doesn't understand the meaning of the sign she's holding but, in another fifteen years she likely will.

It's hard to say what motivates people to finally take action, but it looks like that's what they're doing now and that's probably a good thing.

The Tea Partiers

The Tea Partiers are a diverse group and, while I don't know this for fact, they are probably a lot less crazy than they are portrayed in much of the mainstream media. From what I've seen, they are mostly an older bunch who, understandably, don't like the way government has been spending money lately and think that we should all try to live within our means, something that hasn't exactly been typical of the U.S. government or its citizens in recent decades.

That appears to be changing.

We've come a long, long way over the last hundred years. Those who were adults during the Great Depression and who are still alive today are too old to get out and protest, however, it seems there are more than enough children of those who were scarred by the Great Depression and who can't figure out why the government has to spend so much money that they feel compelled to do something about it.

Anyone over the age of 50 surely knows hardship better than generations that followed, even if their worst pre-1980 experience was having to wait in gas lines, but, it's not clear whether the younger Tea Partiers really know what they're asking the government to do.

Dramatically reducing government spending on all sorts of things that millions of Americans have come to take for granted will cause untold hardship and, while we, as a nation, seem unprepared to embark on an "austerity program", there seem to be more than a few younger folks willing to give it a try.

We'd probably be better off in the end, but will people be able to endure it?

When you think about how unsustainable the current system is, it might be worth a try.

Budget reform doesn't come easily and, in the U.S. there is no better example of this than in California where the state seems hell bent on spending more than it takes in come what may.

Deep Denial

The fact is, there are millions of people in this country, many of them working in the public sector, who are in deep denial about what the government can and can't do.

The past 15 or 20 years have led many people to assume that things can continue as they've been going indefinitely, but, when you look at the prospects for credit-fueled economic growth over the next 15 or 20 years, you quickly realize that it's about run its course.

We've already entered a new era of slower growth and slower credit creation, both of which mean that the government has to spend less.

The notion that governments around the world (and particularly the U.S. government that is now in hock by many trillions of dollars with dozens of trillions more when you include unfunded liabilities) can continue to borrow and spend money at an ever increasing pace in perpetuity is, on its face, illogical and unacceptable to most people.

Sure, an argument can be made that governments will always have some level of debt that grows in a relatively stable relationship with the level of economic activity but, lately, we seem to be approaching escape velocity for that metric.

The result we see today is that people figure they can't spend more money than they make indefinitely and then they wonder why the government should think that it can.

Unless the folks in Washington and on Wall Street can figure out how to inflate another gigantic asset bubble that will make Americans think that they're getting wealthier again, we stand little chance of "growing our way out" of the current mess.

The Campus Protesters

But, the funny thing lately is that, in some parts of the country at the state and local level, the government is spending less and - surprise, surprise - people don't seem to like it. Those who benefit from government largess don't want the spending to stop.

You see these sort of protests in Greece and in other parts of Europe where the public has become conditioned to expect a certain level of benefits from the state and they don't really know or care where the money comes from.

I'll never forget that conversation a few years back with a retired schoolteacher who said that virtually all of the nation's problems can be easily solved by reducing classroom size by half. When queried as to how this would be paid for, the Pavlovian response was "raise taxes".

Just today, we received a note from the Census Department advising us that our 2010 Census form will be coming in the mail next week. Now, how much it costs to mail out this advance notice and whether it's effective in getting a better response next week is unknown, but, whatis clear is that the text of the letter has some scary overtones (emphasis added).

Your response is important. Results from the 2010 Census will be used to help each community get its fair share of government funds for highways, schools, health facilities, and many other programs you and your neighbors need. Without a complete, accurate census, your community may not receive its fair share.

The part about an accurate census being important for divvying up government money makes sense, but the use of the phrase "government funds" and the word "need" makes it sound like the little guy doesn't have much of a choice in the matter - if the government thinks the little guy needs something, he'll get it.

This is surely not what the original foe of big government, Thomas Jefferson, had in mind when he oversaw the first census in 1790 required by the brand spankin' new Constitution.

On the Meaning of Austerity

It's still way too early in the process here in the U.S. to get a good read on this but, interestingly, despite all the recent protests in Greece about cuts in government spending and the new "austerity program" that has been forced upon the public, opinion polls show that the population at large would rather see the Greek government dial back on spending for the greater good.

My guess is that you'd find the same consensus here if the public were asked, though, it's unclear what the response would be if the question were to be stated in a way that identified the sacrifice that they, as an individual, would have to make. For example, if you asked social security recipients if they'd be willing to take a 10 percent cut this year to help steady the government's finances, would they be willing to do so?

As a side note, we've yet to hear the widespread use of the term "austerity program" in this country, but they sure seem to use it a lot overseas. It strikes me that they're really using the wrong word here because there is nothing about raising the retirement age from 61 to 63 by 2015 that should, in any way, be interpreted as being "austere".

Austere is not a relative term as in, things are pretty austere as compared to when the average life expectancy equaled the age at which you could start receiving retirement money from the government.

From Merriam Webster we get:

1 a : stern and cold in appearance or manner b : somber, grave
2 : morally strict : ascetic
3 : markedly simple or unadorned
4 : giving little or no scope for pleasure

"Austere" is definitely the wrong word here.

You Can't Get There from Here

The simple fact remains that people know in their gut that there's something fundamentally wrong in the world today when it comes to what governments are doing with their money and, even if they work in the public sector, they probably know that it's just plain wrong to borrow and spend so much with so little hope of paying it back.

Of course, when it's your family's livelihood that's at stake, you're much more likely to protest alongside the college kids than the Tea Partiers - that's just human nature.

The sad thing about the entire situation is that, realistically, both sides would be well served to lower their expectations for the kind of change they are seeking.

Conventional wisdom has it that developed nations don't really start getting into trouble until their budget deficit is 10 percent of their GDP or their debt service accounts for 10 percent of their overall spending. Here in the U.S. we've eclipsed the first measure and, with any appreciable rise in interest rates back to less-freakishly-low levels, we'll quickly surpass the second one too, due in no small part to the trillions of dollars in debt the folks in Washington have added in just the last few years.

But, that doesn't mean that the D.C. crowd will act any differently than they do now.

The status quo and entrenched interests in a two-party system dictate that the sort of change that is now needed won't come voluntarily and, no matter which party is in power, when it comes to spending, they'll both keep doing what they've been doing until the system just stops working.

The two sides on the debate over spending - the Tea Partiers and the college kids - should probably get used to the idea that neither will get what they want. The first group faces a generation of incumbents who only seem to care about the next election and the second group doesn't yet realize that, in the world today, they are asking for the impossible.

By Tim Iacono
Email : mailto:tim@iaconoresearch.com
http://www.iaconoresearch.com
http://themessthatgreenspanmade.blogspot.com/

Tim Iacano is an engineer by profession, with a keen understanding of human nature, his study of economics and financial markets began in earnest in the late 1990s - this is where it has led. he is self taught and self sufficient - analyst, writer, webmaster, marketer, bill-collector, and bill-payer. This is intended to be a long-term operation where the only items that will ever be offered for sale to the public are subscriptions to his service and books that he plans to write in the years ahead.

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