03/18/2010 05:12 am ET Updated May 25, 2011

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