Decision Time!

We need another "New Hope"

   After wrestling with the worst recession in a lifetime, many governments are now facing an even bigger economic challenge : what to do next. While the issues are complex, the debate over next steps essentially boils down to two schools of thought: First, there are those who urgently insist we need to spend more - even if it requires borrowing money - in hopes of stimulating something better. Second, are those who insist we must get in the habit of spending less and paying down debts to avoid making things worse. Everyone agrees that the consequences of a wrong decision could be enormous.

WHAT HAPPENED?

   For years, individuals, businesses and governments lived far beyond their means. They borrowed excessively at government-induced, artificially low interest rates and then went on spending sprees. All that spending appeared to be great for the economy, which grew at a rapid rate because of artificial stimulation. But what was growing even faster was a mountain of debt and bad investments. Consequently, when the economic meltdown began in 2008, its effects were fierce.

   As the recession spread from the United States to Europe and beyond, credit downgrades and defaults reached record levels. The global financial system appeared to be near collapse. Home values , commodity prices, stock values, currency rates, interest rates and fixed income assets collapsed. Unemployment rates began to soar, aggravated by government barriers to the mobility of employment.

   Governments in the European Union and the United States reacted by pouring trillions of euros and dollars into "relief" and "stimulus" programs intended to restart the economy. But these actions undermined true prosperity. With the government directing the economy, resources went to satisfying political desires rather than the desires and values of individual consumers. Of course, since there was no cash on hand for those programs, governments borrowed and central banks created even more money to fund these efforts.

WHAT THEN?

   Many families and businesses are now slowly paying down their debts and spending less, especially for things that aren't essential. That's why sales of new homes and automobiles (overbuilt due to easy money and government subsidies) have slumped.

   When the U.S. government tried to stimulate sales of those products (through the "cash for clunkers" program and first-time home buyers tax credits), sales briefly rose, but then dropped after the programs expired. The drop in demand for goods and services created a decline in industrial production that was seen around the world. In Japan, industrial production dropped 40 percent from it's early 2008 peak. Even China suffered.

   Since so much of the world's economy depends on consumer spending, this newly frugal behavior has meant a slow-growth economic environment. The U.S. economy grew at an annual rate of just 2.4 percent in the second quarter of this year, following a revised 3.7 percent rate in the first quarter. That compares with growth rates of 5.1, 9.3, 8.1 and 8.5 percent in the first four quarters following the next worst recession since World War II.

ON THE OTHER HAND!

   So, if individuals and businesses have decided it's wise to trim their spending and pay down debt, what are governments doing? Just the opposite. In fact, additional deficit spending by the U.S. government has more than offset any private sector improvements. Keep in mind, this additional government spending is financed with borrowed money. Most governments were already running serious deficits before they tried stimulate any recovery.

   According to the International Monetary Fund, advanced economies - like those of the United States, Japan and Europe - now have public debts that are averaging more than 110 percent of gross domestic product. (Emerging economies, such as India and China, are below 40 percent.) At some point, a nation will have no reasonable hope of repaying its debts. The inevitable result is some sort of default, whether through outright bankruptcy, a restructuring of payments or devaluation of the currency.

WHAT NOW?

   The good news is that the global recession appears to be over....for now. In general, the Asia-Pacific region fared better than the rest of the world. By comparison, Europe is in much worse shape and the United States is somewhere in between. I believe near term expectations are sobering and not likely to excite peoples belief in a real recovery. The economies of Europe and the U.S. are likely to be in a relatively weak, slow-growth mode for several years.

   Recoveries following serious housing busts and credit crunches typically take four or five years as banks and households focus on the hard work of rebuilding their finances. The process for a government to get out of debt is even harder, especially in a slow-growth environment.

DEBT BINGE!

   In Europe, assistance to Greece and other nations has already cost European taxpayers far more than expected, causing some to balk at any notion of taking on further debt to bail out over-extended economies. The Government of France disagrees with taking a conservative approach, and suggests that even more must be done - if necessary - to preserve the European Monetary Union. In the midst of all this disagreement, there are some encouraging signs.

   Ireland's government, for example, has already settled down to the painful task of cutting spending and repaying debt. In the United Kingdom, Prime Minister David Cameron and his coalition government are doing the same. Britons have been told that a difficult period of "new austerity" is unavoidable if there is to be any hope of cleaning up their dire fiscal mess. (Government spending in the United Kingdom - as a percentage of GDP - is even higher than that of hapless Greece.)

FUNDAMENTAL DIFFERENCES!

   Europe's experience is another reminder, if one were needed, that every country with sustained budget deficits and rising debt ... needs to act in a timely manner to put in place a credible program for sustainable fiscal policies. This sort of thought process does not sit well with those urging the government to spend even more borrowed money on further "stimulus" for the shaky economy. Obama says we haven't spent enough! Many who might have agreed with that policy a few years ago now disagree with his policy ideas.

   There is nothing progressive about a government who consistently spend more than they can raise; there is certainly nothing progressive that endows future generations with the liabilities incurred by the current generation. While painful and slow in the short term, it is essential that we allow our economy to adjust. If politicians try to intervene and prevent or postpone this necessary adjustment, we run the serious risk of not just a double - dip recession, but a true depression. But, if we prevent further damage and begin to reverse the harm already done; we should be able to achieve positive long term growth rates. It's important to realize that prosperity is dependent on economic freedom. As citizens, are we going to advocate for economic freedom, or bigger government and lower well - being?

HISTORY LESSON!

   Back when I was at the University of Florida I did a report on two Countries Argentina and Venezuela that undermined their own prosperity by instituting policies that undid what originally made them prosperous. They transformed themselves from free and prosperous societies into nations burdened by unemployment, escalating taxes and runaway inflation. Despite clear lessons from the past, many of the same misguided policies that have devastated those nations are now finding a home right here in the United States.

   After decades of growth and spending in the United States, we now see many disturbing parallels with South America's failures. If you look at the past 10 years of expanding government bureaucracy, spending and debt, it's clear the U.S. is losing ground. As a nation, we are no longer generating prosperity for society as a whole. We will continue to lose ground until government policymakers understand that more spending, more debt, more regulation and more centralized controls of every aspect of life can not make us better off. The simple truth is that many of the "new" or "progressive" policies being promoted in the U.S. are old ideas that have failed throughout history. Why in the world would we want to repeat such serious mistakes?

THE STAKES

   What's at stake in this struggle is the future of the United States. Americans who are concerned about our future must speak out if this course toward economic ruin is to be reversed. Tea parties, for example, reflect a spontaneous recognition by thousands of Americans that if they do not act, the government will bankrupt their families and the country. Although our efforts to draw attention to government overspending pre-date recent tea parties by many years, I certainly applaud those citizens that are becoming more engaged in key policy issues.

   Citizens must hold lawmakers accountable for upholding the Constitutional principles of liberty and personal responsibility that helped the U.S. become productive and prosperous. There is too much to lose if we do not speak up - both to our elected officials and at the ballot box.


MY STANCE!


   When it comes to public policy, I believe the U.S. - not to mention much of Europe - has been headed in the wrong direction for quite some time. Republicans and Democrats alike have been fiscally irresponsible, spending more than they should be borrowing like there's no tomorrow. As a nation, we are, quite literally, going bankrupt.

   The upcoming elections in November will provide a prime opportunity to help steer things in a different direction. By educating ourselves on the issues and voting for those candidates that support economic freedom and prosperity, we have a chance to make a difference. To solve our nation's problems for the long term, we must remain principled and pursue practical, thoughtful solutions - solutions that can actually be implemented.

   We need all citizens to speak out about wasteful government spending. That is the best way to get policy makers focused on the serious problems that spending and unbridled debt are creating. I will continue to advocate for economic freedom and market-based policy solutions because they are proven pathways to prosperity for all. To paraphrase Winston Churchill, a market-based approach to public policy may not be perfect, but it beats all the other alternatives that have been tried.