Numbers Don’t Lie

 

President Obama’s effort to enact a $447 billion stimulus bill was derailed by rejection of the plan in the U.S. Senate. The administration and Democratic leaders have vowed to resubmit it later in various pieces, a strategy designed to wring political favor from the tragedy of high unemployment while avoiding any culpability for an enduring problem.

The new stimulus proposal mirrors the original $787 billion American Recovery and Reinvestment Act of 2009. At best, this effort was misdirected. It shoveled huge amounts of money to various favored places, such as bailing out states, an automobile industry take over, the rescue of failing financial institutions, and large sums of money to “green” investments. Later, add-on spending programs sharpened the focus even further to targeted, government favored efforts, such as cash for clunkers. There were at least four specific efforts to help the housing sector. Simply put, these programs did not achieve the results hoped for. The number of unemployed today is about two million higher than when the stimulus was enacted, housing is worse off, government debt is several trillion dollars higher, and the government bond rating has been reduced. In short, a report card of the administration’s stimulus efforts and financial management would show failing grades.

Reliance on more government spending and increasing debt is not the solution. It doesn’t work and also delays and obfuscates the critical long-term threats to our national security that, if left to simmer, will ultimately bankrupt our country. The government currently borrows about 42 cents of every dollar spent, adding about $126 billion in new debt monthly from roughly $300 billion of expenditures. Both numbers are increasing every month. The biggest drivers of higher spending and deeper deficits are Social Security, Medicare and Medicaid. The unfunded liability of these programs (i.e., the benefits Congress has promised to pay but not provided for) is estimated at $99.4 trillion. The Congressional Budget Office estimates that Medicare will go bankrupt in nine years, and that interest on the national debt and spending on these programs will consume 100 percent of the federal budget by 2025. Actuaries both inside and outside the government have stated that the new health-care law will add to the deficit, and that projected savings are illusionary.

 

Two and a half years later, we are left with an economy that is operating considerably below potential — and closer to the dates the bills come due. The lessons from the administration’s approach are old ones, painfully relearned. When the government micromanages the economy, the results are more spending, ham-handed regulations, higher taxes, more debt, declining productivity, and less job creation. Rather than more of the same, a complete change of direction is required. This includes a radical redo of our outdated and anti-competitive tax code, eliminating loopholes and special exemptions, and restraints on new regulations.

Government policies that emphasize and support private initiatives would quickly restore confidence. Giving the reins to the private sector from government hands would bring out America’s strengths and result in a virtuous circle of business expansion, job creation, and improving private incomes and consumer spending. The alternative is a European-style sclerosis. The numbers don’t lie.

Alfred A. Lagan

By

Alfred Lagan is the founder and chairman of Congress Asset Management Company, a respected investment management firm in Boston, MA. Prior to starting Congress in 1985, he held senior investment positions in several financial services firms. Mr. Lagan holds an MBA from New York University with distinction, and a BA in economics from Iona College. He was born in New York City of Irish immigrant parents, and served four years in the Navy.

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