Government Spending And The Economy — A No-Win Situation

Because governance of the United States is dysfunctional and corrupt, and has been for as long as most people can remember, America lurches from crisis to crisis with no good outcome in sight. So much money has been doled out to special interests over the years (e.g. in defense or health care) that the U.S. now runs huge annual deficits and must borrow or print money (via Fed bond buying) to meet its obligations.

One result is that the U.S. economy is now very dependent on government spending. That situation will only get worse in the future as Medicare and other spending bankrupts the nation.

The latest crisis comes after we've finally finished up this exercise in futility called the 2012 Election. It is called the fiscal cliff.

The economy is highly dependent on government spending, but the government's ability to increase revenues has been impaired primarily by the Bush tax cuts, the poor economy, and foreign wars according to the Center on Budget and Policy Priorities. If Congress does not act before 2013, government spending will be slashed and the Bush tax cuts will expire. That is the cliff we will allegedly fall off if Congress fails to do their duty.

But when has Congress ever failed us?

As a result of the fiscal cliff, the conventional "thinking" goes, the United States economy will go down the tubes in 2013. In fact, we've already started to see some damage according to the National Association of Manufacturers.

The “fiscal cliff” is still two months off, but the scheduled blast of tax hikes and spending cuts is already reverberating through the U.S. economy, hampering growth and, according to a new study, wiping out nearly 1 million jobs this year alone.

The report ... predicts that the economic damage would deepen considerably if Congress fails to avert the cliff, destroying nearly 6 million jobs through 2014 and sending the unemployment rate soaring to near 12 percent.

Note the jobs miracle which occurs in 2016-18 and the GDP miracle which precedes it in 2014-2016. Source: Fiscal Shock: America’s Economic Crisis report prepared for the National Association of Manufacturers and The Washington Post

To sum up, we note without irony, given that the government itself created this mess, that—

1. The U.S. economy is highly dependent on government spending.
2. Unless the government increases revenues, total U.S. debt held by the public will reach 100% of GDP in 2020. The debt held by the public stands at $11.3 trillion right now. That number does not include the IOUs the U.S. Treasury has written to the social security and medicare trust funds, which amount to another $5 trillion. There is little doubt that future GDP as estimated by the Congressional Budget Office has been overstated, so public debt equaling only 100% of GDP in 2020 is a very conservative estimate.
3. The only way the government can raise revenues is to take large amounts of money out of the economy, assuming that curtailing foreign wars and other measures are off the table (but see directly below).

Since the U.S. economy seems incapable of organic growth fueled by the private sector in the foreseeable future, it will thus remain dependent on government spending for many years to come. But the government will face utter bankuptcy by 2020, or it will print money and devalue the currency to pay its bills, or it must take large amounts of money out of the economy to make ends meet.

I know what a no-win situation looks like, and I am looking at one right now.

Comments

[Bill Hicks]

This just highlights the stupidity of so many libertarian-type economic commentators (in particular all those who get routinely linked at Zero Hedge) who are always blathering on about the glorious economic recovery we would supposedly have if we only slashed government spending. Dramatically slashing government spending now versus attempting to kick the can down the road as long as possible is really the difference between a fast crash and a long, drawn out crash. Either way, the economy is screwed.

[Ben]

The blame game after the initial hit to the economy will be very dangerous. I hope against all hope nothing too destabilizing occurs.

[JohnWDB]

I understand these prognostications are dire, and I respect the heck out of Tim Iacono, but I'm much more easily swayed by internet memes, which suggest the primary issue facing America in the next 4 years is whether Big Bird will suffer from budget cuts. Big Bird, people!

[Mike Roberts]

I'm always amazed at these so-called reports (as though they are reporting the facts) that project future levels of X or Y. When I see year to year changes, rather than a smooth curve, I think how can the authors possibly determine what will happen on a yearly basis in the future, except in trend terms? CERA do the same with their oil production projections showing yearly variations 20 years out. For something like a specific commodity it may be possible to do yearly projections based on development plans over the near term but further out, and for less specific things like GDP and unemployment, I can't see how such analyses can be taken seriously.