Does Stimulus Lead to Prosperity?

The US government will spend over $6 trillion this year, running a deficit of over $1.5 billion. Government expenditures are expected to be over 40% of GDP by next year, the budget deficit will be over 10% of GDP and our total debt will exceed our GDP for the first time since World War II.

The argument for a massive spending increase as economic stimulus makes the assumption that spending is the source of our prosperity. Based on that false assumption, it is very easy to logically arrive at a wrong conclusion.

But in fact it is the combination of wise spending and prudent investment that creates prosperity.

Right now, the economy needs confidence, not spending. It needs a repudiation of the widespread belief that we could have cheap credit and home ownership to all, without any consequences.

A trillion-dollar increase in the federal budget deficit will not enhance investor or consumer confidence. A debt financed spending increase of that magnitude not only squanders precious resources on projects of dubious value, but will also crowd out private investment and discourage private spending, thus threatening the economic recovery.

In addition, it will impose huge costs on future generations, and therefore ensures higher taxes in the future. That is not the road to prosperity.

What we need instead of those counterproductive and damaging stimulus programs is a fundamental reform in our spending and entitlement programs. We will have to cut expenses, and reform Social Security and Medicare. This is not the first time it has been proposed, and a detailed plan was put forth by, among others, Professor Russ Roberts from George Mason University.

Given our demographics, Social Security and Medicare are not viable in their current form and structure. In the last 70 years we have pretended that they are insurance programs. In fact, they are welfare programs masquerading as pension and insurance plans that actually take money from the poor and hand it to wealthy retirees.

The absurdity of the wealthy taking a handout from the poor in the form of a retirement and health system they can afford on their own is lost on the American people, partly because the system is designed to obfuscate the welfare components that are buried deep inside it.

Government at its best is a transparent one, with fair and explicit arrangements that are clear to all. Social Security and Medicare should become means-tested safety nets for the poor. Those who are capable of taking care of themselves should do so, while putting aside money for those unable to do the same.

This will not only be a fair, common sense arrangement, but will also alleviate the burden off our strained national debt, simplify our budget process and assure the rest of the world that American finance is once again on solid footing.


Alan Schram is the Managing Partner of Wellcap Partners, a Los Angeles based investment partnership. Email at [e-mail].

Comments

[NetLoa]

What the economy needs is a crackdown on the non productive wealth counterfeiting and capture of speculation. This can start with massive new regulatory constraints on banks and hedge funds, and carving up anything "too big too fail". That means you, Goldman Sachs.

Then we can start reworking the tax code to penalize firms that offshore their manufacturing or other parts of their work force, instead of rewarding them.

Finally, we can raise top income tax rates back to where they were before Reagan blew the first hole in the federal budget.

That will solve both our economy's problems, and also the federal deficit.

[DiogenesOfAlaska]

'The argument for a massive spending increase as economic stimulus makes the assumption that spending is the source of our prosperity'

No it doesn't. This is a strawman.

'the economy needs confidence, not spending'

It needs both.

[dobberdoss]

Finally, someone gets it! borrowing and spending money you don't have or have not earned is a "fools gold" mentality . Even when government do it, it's just plain stupid

[DAE]

Hey buddy, we're all (at least 90%) now.

[PlaceboStudman]

Hmm...I was having a bit of trouble following this at the begining, but I think I get it. And I have to say, I agree. if a person is vital and healthy, mentally and physically capable of working, even into their 70s, 80s or 90's, they should not be required to take advantage of the benefits of Social Security or Medicare. The same thing goes for the disabled. If a disabled person CAN work, and wants to work, they should be allowed to work at whatever job they are qualified for, and the more elderly or disabled who are able to work, the more money there is to go around in the safety nets of SS and Medicare for those people who honestly genuinely can't use them.

Sadly, this does ignore one major factor of human nature. The fact that many people still believe that only "the best and the brightest" are hireable. This has led to cases of age discrimination and violations of the ADA. And while I abhor the idea of anyone suing themself into a job, perhaps that is the best way for society to come to grips that there really are far more people who CAN work and who WANT TO work, but aren't working because they are deemed "unhireable", without even the slightest consideration of their actual abilities, when the employer sees even potential for a downside in their bottom line