06.16.2010 0

Driving right off the cliff

By Bill Wilson

To accept the arguments in favor of Barack Obama’s $50 billion bailout of bankrupt state governments like California and New York, one has to believe that fiscal and monetary “stimulus” to date and other government interventions, totaling trillions of dollars, have merely been insufficient — and not a complete failure — to the task of restoring sustainable growth to the U.S. economy.

Further, one has to trust fiscal and monetary authorities who insist that deficit-spending “stimulus” must continue unabated until such a sustainable recovery emerges — no matter how long it takes, how much it costs, or what the negative impact on the solvency of the public treasury is.

Writing for the New York Times, Bob Herbert compares government “stimulus” efforts to driving up a mountain: “Imagine that you’ve got the gas pedal to the floor (or almost to the floor) as you try to get your vehicle to the top of a mountain, where the road will level off. You’ve made real progress, but the vehicle is straining and wheezing. You’re not there yet. Why in the world would you lift your foot off the gas and risk rolling back down the mountain?”

Taking Herbert’s premise at face value, that we’re climbing a mountain — and not stuck in a ditch spinning our wheels in the mud, slowly sinking — automatically, the question becomes: If we’re not there yet, when will we be? How much expansion of the national debt is enough to right the economy?

To that, Herbert offers no answer. Instead, his solution is to keep the nation’s foot firmly on the accelerator. Right now, the national debt is at $13 trillion, about 90 percent of the Gross Domestic Product (GDP), and is currently growing much faster than the economy. This year’s projected $1.556 trillion deficit represents a 13 percent increase in the debt from its 2009 level of $11.876 trillion.

Compare that with the anemic 3 percent growth the Bureau of Economic Analysis reports in the first quarter. Over the past 3 quarters, the economy has grown by $450.2 billion, and by the end of this quarter, will only have grown by about $600 billion. That means for every dollar borrowed and spent on “stimulus” this year, we have lost about 60 cents.

But Obama and Herbert’s madness does not end there. According to their Keynesian premise, “stimulus” must continue to be directed at insolvent states that refuse to balance their budgets to reflect declining revenue. The $50 billion in new funding would come atop the $53.6 billion that was included for states in the 2009 “stimulus”.

This, at a time when the greatest threat to the economy is a mountain of sovereign debt that cannot possibly be paid. As seen in Europe, when governments spend far beyond their means, bad things happen. And yet, Obama and Herbert want to sustain the states’ unsustainable spending levels.

According to a CNN report, states face a $180 billion shortfall for the upcoming fiscal year, which for most of them will begin at the end of this month. The problem has been getting worse every year as states refuse to make the tough decisions. Compared with prior years, according to Sunshinereview.org, state budget shortfalls totaled $113.2 billion for FY 2009, and then rose to $142.6 billion in FY 2010.

California currently faces a $20 billion shortfall. On the east coast, New York faces a more than $8 billion deficit, and New Jersey too faces an $11 billion deficit for 2011.

According to the National Association of State Budget Officers (NASBO), state spending grew from $945.3 billion in 2000 to more than $1.5 trillion 2008, almost a 58.7 percent increase during the 2000’s, where revenues were generally rising because of inflated property values. It was a bubble in which state politicians made the same bad bet investors of mortgage-backed securities made — that property values would never come down.

It was an irresponsible assumption, and yet states expanded spending dramatically during the boom years. The trouble is that when the housing bubble popped in 2007, the drop in state revenues was entirely predictable. Nonetheless, state spending still grew by about $100 billion in 2008.

Now that property values really have plummeted, and so have revenues, the states simply refuse to cut the additional spending from the boom years.

It gets worse: in order for the states to get revenue back up to 2007 levels, there would need to be a full recovery in housing values. But according to the Harvard Joint Center for Housing Studies’ State of the Nation’s Housing report, home values are 30 percent off of their 2006 highs.

30 percent. For states to get that lost revenue back, home values will have to rise substantially. Even with the trillions of dollars of fiscal and monetary “stimulus” already committed, that won’t happen by next year, or the year after that. Meaning if Obama gets away with another $50 billion to bail out the states this year, the states will be back again next year, asking for more.

So, to answer question: Where does it end? It doesn’t end. It will never end — until governments across the country take the responsible steps to balance their budgets in accordance with revenues as they really are, not as they wish revenues would be.

The alternative is madness: Keep spending, and hope the sovereign debt crisis does not catch up with us. We cannot take that chance. Herbert could be half-right, after all. We are driving up a mountain, and we do have the pedal to the metal. And when we reach the summit of this debt bubble, we will fly right off the cliff.

Bill Wilson is the President of Americans for Limited Government.

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