How to fix the economy: It’s the spending, stupid

How to fix the economy: It’s the spending, stupid

During the 1992 presidential campaign, Bill Clinton’s campaign strategist, James Carville, hung a sign up in the now famous “war room” in the candidate’s headquarters in Little Rock.

The sign had three points: 1) Change vs. more of the same, 2) The economy, stupid; and 3) Don’t forget health care.

The second point was popularized as “It’s the economy, stupid” — and so it still is, both in the United States and in Israel.

The United States has undergone a nail-biter in the past few months over whether the government would raise the national debt ceiling or default on its debt. An ancillary question was whether U.S. debt would be downgraded. The answers are yes, no, and yes and no.

After arduous debate and dealing, the national debt ceiling was lifted by one of the largest amounts in the history of the United States.

The issue of whether the country would default was a straw man, a canard. If it had happened, it would have been at the discretion of the administration. Even if the debt ceiling had not been lifted, there would have been more than sufficient revenue to the Treasury to service the debt interest, which is all that is required to prevent default. Thus, the administration would have had to prioritize its expenditures; the choice to service the debt would have been entirely its own.

Hours after the debt ceiling was lifted, new borrowing took total public debt to $14.58 trillion, over the end-2010 GDP of $14.53 trillion, and put the United States in a league with such highly indebted countries as Italy and Belgium. A debt ratio, public debt to GDP, of over 100 percent is considered a fiscal wasteland from which there is little hope of return.

Since the deal, the Dow has plunged about 700 points and Standard & Poor’s downgraded United States debt from AAA to AA. In an interview in April, Treasury Secretary Timothy Geithner said there was no risk of the country losing its AAA rating. S&P says there is a one in three chance that U.S. debt will be downgraded further over the next 24 months. Other credit agencies have threatened to downgrade but have not done so.

How did we get here? Spending beyond our means to satisfy the demands of various groups is a good start. We’ve had TARP for the banks, General Motors became Government Motors, “Cash for Clunkers,” and trillion-dollar stimulus packages that benefited mainly state and municipal governments and academic research. Real income is down and the unemployment rate is still over 9 percent, with the true unemployment rate even higher with discouraged job seekers dropping out of the market.

We are financing entitlements with public debt. Using long-term debt to finance current expenses is a financial no-no. In its rush to make the United States into a European-style welfare state (which is not working for the Europeans of late), the administration has added trillions of dollars to the national debt. When Obama entered office, the debt was $10.6 trillion. Today it is $14.6 trillion, an increase of $4 trillion dollars in two years — or 38 percent.

A July 28 Wall Street Journal editorial warned of a downgrade and gave a short history of the entitlement state. Stating that the origins of the downgrade go back decades, it looked at how the entitlement state started under FDR and grew under LBJ. Social Security troubles started in 1972 when benefits were increased and a cost-of-living adjustment was added. By 2010 entitlement payments to individuals were 66 percent of the federal budget, up from 28 percent in 1965.

The editorial speculated “We suspect that in the 1960s as now — with ObamaCare — liberals knew they had created fiscal time-bombs. They simply assumed that taxes would keep rising to pay for it all, as they have in Europe.”

But, surprise: Jobs and revenue to the Treasury are being lost and the average taxpayer, who has difficulty making ends meet, is rebelling, as demonstrated in the 2010 congressional elections.

The nation is becoming increasingly polarized over how to handle the future. However, it should be clear that “tax and spend” is no longer the order of the day. The issues are now, or should be, how to curtail government spending in such a way as to restore America’s credit rating and to create more jobs in the private sector.

Over in Israel, they have had a fairly good economic run. The economy is strong and Israeli technology and innovation are in demand. Recent finds of oil and natural gas could make Israel energy self-sufficient and even an energy exporter.

But Israel too faces economic unrest. This Sunday The New York Times reported: “At least 250,000 Israelis took to the streets on Saturday night to demonstrate against the high cost of living and lack of affordable housing, the largest in three weeks of protests aimed at forcing social and economic issues onto the government’s agenda.”

In essence, the demonstrators are looking for entitlements to ease their financial stress. They only have to look at the current economic posture of the United States and Israel’s own socialist past to see where that path goes.

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