Federal Spending Out of Control

I am concerned with the budget deficit and the many spending initiatives now being floated around Washington, DC.

Recently, the U.S. Conference of Mayors went to Capitol Hill to ask for a handout, or as they put it: "A total of 11,391 infrastructure projects are 'ready to go'...at a cost of $73 billion."

A wish list that is 11,391 projects long! What vital infrastructure taxpayers get for their $73 billion? If you think these are highways, bridges or schools, you are wrong. Here's a sampling:

- Hercules, Calif., wants $2.5 million for a "Waterfront Duck Pond Park,"
- Natchez, Miss., "needs" a new $9.5 million sports complex,
- Arlington, Texas, needs $4 million to expand its tennis center,
- Miami, Fla., needs $3.6 million to build a covered basketball court and $94 million for the Orange Bowl parking garage,
- Oakland, Calif., needs $1 million for a Latino Cultural and Performing Arts Center.

This is not what Alexander Hamilton had in mind when he set up the first federal debt program.

We must recognize that government has no money that isn't ours. It is not the "government" that hands out these bailout packages and money for projects. Government is simply a middle man, a tool to join our resources together. The cost of these bailouts is borne by us taxpayers, and the whole thing amounts to a giant transfer of wealth to the employees and shareholders of the weak and failing industries, and to the citizens of towns that have the most assertive and brazen mayors.

In addition, government intervention in private markets keeps productive assets---be it steel or capital goods or labor---in an inefficient condition. And deficit spending does damage on several levels: First, when the Treasury borrows money, it pushes aside private borrowers who could put the money to more efficient, productive use. Second, when the Fed prints money it devalues the dollar, to the detriment of all Americans except those receiving payments directly from the Government. And third, government spending obscures the process of finding optimal prices and production levels, thus creating an unsustainable situation, a fake recovery that will end when inflation stops.

To me it seems like the Fed is trying to debase the currency, i.e. make the dollar cheaper so that the Federal Government can pay its huge debts with cheaper dollars. This pernicious policy will have major adverse consequences on our economy, among them rampant inflation and a run on the dollar, and will not serve the recovery from the current financial crisis.

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

Comments

[marijam]

- Hercules, Calif., wants $2.5 million for a "Waterfront Duck Pond Park,"
- Natchez, Miss., "needs" a new $9.5 million sports complex,
- Arlington, Texas, needs $4 million to expand its tennis center,
- Miami, Fla., needs $3.6 million to build a covered basketball court and $94 million for the Orange Bowl parking garage,
- Oakland, Calif., needs $1 million for a Latino Cultural and Performing Arts Center.
******************************************************************************************
None of these should go forward. This is not "infrastructure", no way, no how. Infrastructure would be a new electrical grid in areas where its needed, and bridges being replaced, and free wifi for everybody. High speed trains and bus lines. Subsidizing sports so that investors can make millions off of the backs of the taxpayers - no more.

[wiseapple]

These projects give construction businesses some business; they will in turn hire people to work, pay them money so they can go buy things at other businesses- and before you know it, it begins to look like economic activity!

[tracer289]

I am not convinced that government can in any way "stimulate" the economy. Rather all the evidence points the other direction.
Central banking and central planning have been the tools of despots since time immemorial.

Unfortunately very few Americans have ever heard of Ludwig von Mises, Murray Rothbard, or even Ron Paul. Very few Americans understand liberty, historical and contemporary. Even fewer Americans could explain what fractional reserve banking is, what the federal reserve bank does, the difference between fiat and sound money, and how all of these impact our economy.

Productivity creates wealth, not spending and consumption. Government is not productive, it is restrictive. Occasionally its corrupt.

Fortunately fiat currencies can not be used indefinately. Unfortunately, fiat currencies never go quitely.

[swift goat pet for truth]

While what you say about fiat currency is true, even if one wanted to return to metal based standard, the transition would be quite messy.

Furthermore, things like growth and expansion (real ones, not ones that are based on debt) need to be redefined.

[marijam]

I understand anarchic capitalism very well and I do not want that.

[G8R4Obama]

Look, fella, we've tried it the "Friedman, neocon, I'm getting mine and the he*l with the rest of you" way for the last 30 years, and that's what's gotten us to this point. Your neocon/fascist arguments clearly don't hold water anymore.

As for the projects you listed that you consider "pork", keep in mind that each of these projects are intended to help build and sustain communities, and they likely have much more value in the big picture than you think (since "community" isn't important at all to neocons).

I'm a mathematician, but I know that there's more to it than just the "numbers" - there's more to life than money!

[marijam]

You've got the wrong idea if you think building sports complexes and community outlets is promoting the general welfare of an entire nation.

[wiseapple]

This gives me a new perspective on the adage "tool of the trade"!

[William1950]

jobs baby jobs

[jsarets]

GDP = Private spending + Public spending

Government spending isn't the best-case scenario, but in case you haven't noticed, the private sector has pretty much capitulated. Nobody thinks they can turn a profit anymore, and nobody thinks they have discretionary income anymore.

Money seeks interest, bears interest, and is created of interest. Private capital looks at the market and would gladly lock in a fixed 0% over the next 6 months. The rational expectation is that profit has gone the way of the dodo bird.

So we're creating all this money out of interest, and it's bearing interest as we speak, but there's no interest for it to seek. It's a liquidity trap, and the only way out is to bypass the capital markets and spend (rather than lend) money directly into the real economy.

It's either government spending or Milton Friedman's workaround where the Fed -- which is considerably less accountable to the people than even the executive branch -- drops "helicopter money" onto big business.

Every way out of a liquidity trap is bad policy. But if we don't do it, the economy will suffocate to death by next summer, and this ideological debate will look silly in hindsight.

[rlert]

This is a very simplistic analysis of macro economic policy. The "crowding out" argument is only valid if the spending of government were to be predonominantly on private goods versus public goods. Government spending on public goods is well understood after freshman economics couses as the provision of those products for which exclusion of the benefits is practically impossible. The classic example is defense, once national defense is provided for a citizen they benefit from its provision whether they would have procured the product on their own or not. That fact means there is an inherent disincentive to reveal one's preferences for public goods so one can free ride on other's consumption decisions. This is the primary justification for any form of governent spending. Determining the optimal amount of pubic good privision, on the otherhand is extremely difficult due to the entire revealed preference issue. However, so long as the economy is not operating at or above capacity this is not really an issue and crowding out is a canard.

The fact is that at the moment aggregate demand from the private sector is well below that of economic capacity and we have reached the lower bound of effectiveness for monetary policy. Hence, in order to return the economy to functioning at something closer to its capacity the demand needs to be increased and the only available economic agent to do that is the government.

See Krugman's blog for a model expanding on this.

[datdude92]

Easy way to solve the financial crisis.
1 Void all CDS
2 Ban shorts and all CDS or CDO
3 Pull Mortgage backed securities off of the market.
4 Ban all negative investment schemes
5 only allow companies that produce a product to be on the market for people to invest in.

Easy ways solve the mortgage issue.
1) take all Sub-prime loans and turn them into FHA loans
2) Take all FHA loans and apply a one time appreciation assessment using current interest rates. (example 100k home @ 10%apr= 10k in interest, 100k in principal to be paid over the length of the loan. )
3) make all loans payable over a 30 year period with no penalty for pre-payment and the interest (10k) is paid first.

This would make loans affordable for current residents, the property value would not drop, FHA loans are transferable so properties could be bought by investors who could make a profit off of rental right away. monthly payments would be as low as 300 per month.


just some of my thoughts

[demockracy]

The meme here is that we're over-spending, and already over-taxed. It's the same kind of thinking that informs the current California budget crisis. Incidentally, the Census bureau says California ranks 10th in the nation in income, but only 22nd in tax burden.

...but no, we're over-spending, and under taxed.

Finding stupid government spending is like shooting fish in a barrel. But hiring good help to direct such spending would be profligate.

California used to have a world-class infrastructure and school system. Since (tax-reducing) prop 13, its students rank in the 48th percentile in test results. The Howard Jarvis institute asserts that inflation-adjusted per-student spending has risen 30%, but does not mention that a) women's liberation has given competent women many more opportunities since 1978, so we should either roll back equal rights, or expect to pay more, and b) California housing costs alone have increased more than enough to compensate for that 30% "raise" teachers have received.

An impoverished public realm describes the American trend since the 1950's (see Andres Duany's "Suburban Nation: The Rise of Sprawl and the Decline of the American Dream" for details, and a painless, easy solution) For an intro, see http://www.youtube.com/watch?v=rwd4Lq0Xvgc (all 9 parts, please)

Also, I suggest a look at Larry Beinhart's note about how government spending lifts all boats (actually about how higher taxes are better for the economy): http://www.alternet.org/workplace/106979

[BillZBubb]

Were you concerned about the Federal Deficit when Reagan was president? Or how about Bush the Lesser? Now, the deficit is a big concern? Too late. Now is precisely the time for the government to pour huge resources into pulling us out of the Republican economic tailspin.

Yes, the money needs to be properly managed and as much pork as possible removed, but there are more than enough worthwhile projects to consume $1 Trillion in stimulus over a few years. Fight the pork, not the stimulus.

As for "pushing aside" private borrowers, that argument is absurd at this time when private borrowers cannot access credit. Surely you are aware that the credit market has dried up?

[Jond0]

Yeah, private borrowers. Businesses are always excited to pour their own money on infrastructure type investments and fund public works projects such as schools, roads, electrical grids, clean water, etc...

And when these types of projects are funded privately, I know as a citizen I really enjoy paying for all those with usage fees and tolls. Don't we all? (we do have to pay taxes, but costs borne by all can get more done for less)

[Trebor1]

Now - if only we could get business to pay its fair share of taxes.

[marijam]

It's a very great insult to all taxpayers for government officials to join up with "Wall Street" in selling off roads to other countries that the taxpayers had paid for. It must stop.