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Less Is More, If “More” Government Is What Consumers & Business Owners Fear
Posted on September 14th, 2011 No commentsRecent polls indicate that far more consumers are concerned about the level of our debt and deficits than they are about unemployment (perhaps because 9 of 10 people who want a job have one, but all 10 are concerned about the now-clearer implications of excessive spending and debt accumulation). So, it would seem to follow that if consumers are most afraid of debt expansion, then more large government programs to “stimulate” the economy might heighten their fears and produce even more contractionary behavior (more saving, postponed buying) which could offset, even overwhelm, any expansionary power the new program might contain. Measures of consumer and business confidence in August strongly suggest that confidence in the future of the economy deteriorated in the past month.
Small business owners were clearly not convinced by the debt ceiling agreement, as sentiment, after eroding by small amounts for 5 months, took a plunge in the August survey; a vote of “no confidence” on policy. Only 7 percent thought business conditions would be better in 6 months while 41 percent expected them to be worse, 23 points worse than July. Twenty-one percent expected real sales volumes to rise over the next 3 months, but 34 percent expected declines, a net deterioration of 12 points from July. The prospect of no real progress on the spending/deficit path clearly discouraged business owners.
The August University of Michigan/Reuters poll of U.S. households provides more support for this proposition. Three-fourths expect “bad times” for the economy in the coming months, just below the survey record of 82 percent reached in 1980. Asked for examples of recent news that explained their pessimistic view of the economy, 25 percent provided spontaneous negative responses about government, a record in the 50-year history of the survey (the last record occurred in 2010 when the health care act was passed). When asked to rate the Administration’s economic policies, 57 percent gave a negative rating, a record high, exceeding the worst ratings given to any past President. Only 5 percent had a positive view of Administration policies. Survey director Dr. Richard Curtin put it well: “Consumers have shifted from being optimistic about the potential impact of monetary and fiscal policies to a sense of despair and pessimism about the role of the government.”
If more debt and government spending have become the major concerns of a majority of consumers, then the more the government tries to do with big spending and borrowing programs (“we’ll tell you how we’ll pay for it later”), the more fearful of the future many consumers and business owners will become, inducing them to spend even less and save more. This does not promote the recovery we need in the consumer sector to re-start hiring and small business investment.
If this is the case, it might be more stimulative to announce a bold plan of retrenchment in government spending, identifying very specific spending cuts (particularly in special interest spending which is not broadly popular) that would occur immediately to clearly and convincingly reduced the deficit and later even reduce the level of debt. With confidence in the future restored, consumers and business owners may well be much more willing to bet their earnings on the future by hiring and spending. This is the kind of broad-based “stimulus” that is needed, growth in the private sector (with the employed spending more money), not in government’s share of GDP. Absent confidence, tax cuts will be saved, not spent, and current consumption might be reduced as well. It’s a “confidence game” worth thinking about.
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No Bottom-Line Responsibility = Financial Crisis
Posted on April 2nd, 2010 No commentsCities, states and countries are now facing serious fiscal problems which arise from the simple fact that public managers face no bottom-line accountability. Managers, with horizons driven by election cycles, not the longer term interests of the “company,” too easily cave in to special interests and public pressure. When the garbage collectors go on strike, the pressure on city politicians to settle is strong indeed. Over the past few decades, government has grown in size and largess.
In California, prison guards and highway patrol officers earn up to $100,000 a year (with overtime) and can retire as early as age 50 with a benefit that can reach 90 percent of income [The Economist, February 27, 2010, page 38]. Even in small cities, pay and retirement packages for government workers far exceed comparable jobs in the private sector.
In Greece, the retirement age is 61 and the retirement benefit is 80 percent or more of the last pay earned for public and private workers (and they receive 14 “monthly” paychecks per year).[Financial Times, March 1, 2010, page 10]. These stories are replete in city after city, state after state and country after country. Private companies cannot survive such mismanagement. General Motors is a classic example.
Over the decades, the UAW, with pressure from government to avoid strikes and promises of protectionism, helped destroy the company. The bottom line was terrible, but politics trumped rationality, and GM is now a government-owned enterprise. Taxpayers will never recover their (involuntary) “investment” in GM which many feel should have been allowed to go through a structured bankruptcy that would have kept what was good and shed the units and contracts that guaranteed that GM would remain unprofitable in a competitive market. This administration has made clear its intent to support public and private unions in spite of these growing problems.
Add to this extended periods of cheap and easy credit which further lowers the cost of caving in to pressure and the stage is set for the fiscal disasters we face today. The larger the role of government in a country, the larger the potential for inefficiency and mismanagement, corruption and graft. Government entities avoid “bankruptcy” by taking an ever-rising share of private-sector income, but even this has it limits as we are about to discover (40 percent of tax filers don’t pay any tax).
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