If Government Finances Were Managed Like (successful) Businesses the U.S. Would be a Richer Place to Live
Imagine this: You are heading up a business that has – in the past – enjoyed remarkable success. In fact, due to a history of an enlightened, innovative management and hard working of employees, the company had become the most successful and dominant in its industry. Then, almost imperceptibly, things began to change.
Over time, competition – especially from foreign companies – began to erode your company’s dominance. Whereas you formerly used leverage (debt) to finance technology and new product research, now the growth of debt is becoming perilously close to matching revenues and exceeding profits. Still, it is manageable.
Then things got even worse. Your competition became more strident, just as market demand began to decline. Almost before you knew it, sales and revenues began to slide. However, being optimistic that this was an aberration rather than a trend, you did not reduce expenses, but instead, moved forward as if nothing had changed.
But, much to your chagrin, you discover the change was real. You soon found it necessary to borrow more and more each year just so your company could maintain its status quo. Then finances reached the tipping point. As revenues declined you were using borrowed money just to stay even with the cost of your operations. Strapped for cash, you had no capital to invest in needed new technologies and products to sustain growth. Even worse, you were forced to actually borrow money from your competitors, who were who were only too solicitous.
Before long, you have reached the burdensome point where your company debt is almost equal to the total value of your company. The idea that your company could grow its way out of such a level of debt, as it had in the past, becomes nothing more than a hope and a wish. At that juncture you realize you will soon become so beholden and indebted to your competitors that unless some type of drastic action was taken, you would be working for them just to stay in business.
Your actions (or failure to act promptly) had backed you into a corner with only two options: you had to make drastic and painful changes to the way you did business or you’d go bankrupt.
Imagine as well how complicated your job would be if, when you propose actions that are needed to right the company, your board of directors, shareholders, debt holders and employees all resisted the proposed changes. They suggest you are simply “crying wolf” and that if the company keeps doing what it has been doing ,everything will be okay –even if it has to borrow more money to do it.
What do you think will happen to this company? In the real world, the ultimate bottom line is that you need to exhibit courage and garner the support of stakeholders to do what is right or you will fail and be gone.
Now, let’s go from the real to the surreal world.
Everyone has been bemoaning and decrying the sad and fragile financial state of our federal government. (For that matter, all governments.) As annual deficits pile on top of previous deficits growing an almost unfathomable nation debt, those from all spectrums of the political and financial world call for reform and resolve to solve the problem before it is too late.
And yet, when it comes time to bring home the bacon, no one wants to get dirty to slaughter the pig. When President Obama’s bipartisan commission on reducing deficits and the national debt this week presented its preliminary findings, it was met with angry howls of indignant protest. The irony is that while protests came from far and wide, the most vociferous of those came from the very individuals who had been the most vocal and critical of the deficits and national debt.
No doubt the recommendations made by the commission for reduced spending and increased taxes appear harsh – reductions in defense spending, Social Security, Medicare, a reduced federal payroll and farm subsidies, along with increases in many taxes – but this is only because the problem is so draconian in nature. What the White House commission is attempting to rightly do is hold up a big sign in front of everyone with the message:
“If you are really serious about cutting government deficits and reducing the nation debt, this is what will be required.”
No sooner had the proposals become public than the politicians began to push and shove their way onto the media to be the first to condemn the commission’s recommendation. Of course we should not be surprised by this reaction. Most of our politicians and leaders stand for nothing other than winning the next election. We could accept a politician who is a little dim-witted, duplicitous or even self-serving, but the extraordinary occurrence of having all three of these qualities combined in most of our politicians should be intolerable to us. And shame on us for allowing that. Just once I would like to see someone reelected for taking a stand on what was right, not just popular.
This is not to suggest that all the recommendations of the White House commission should be accepted as presented. They do, however, sharpen our focus on the type of actions needed. Certainly the proposals of the commission are deep and drastic since they reflect how we Americans have been living beyond our means. But, if we are serious about deficit and debt reduction, they are the type of actions that – painful through they are – will be needed. Unfortunately, I have little confidence that we will see and hear from our politicians is nothing more than firebrand rhetoric and political inaction.
And the Moral of the Story …
When a business falls into the habit of spending more than it takes in – especially when it spends to preserve today, rather than investing in the future – it creates a downward spiral that guarantees only bad things can happen. If continued unabated then failure is the only outcome.
When government falls into the habit of spending more than it takes in – especially if the spending is for the next election rather than investing in the future – it does not, by their nature “fail,” but rather, the government and the society descend into chaos. Just ask the Greeks, the British and the French.
It is not like we can’t see the end of the path we are going down. All we have to do is open unbiased eyes and observe what is happening. The debt and deficits are like a cancer growing on our body-public. Treatment for cancer is painful. When diagnosed with the disease our initial reaction is denial and then to delay and search for methods and doctors (quacks) that promise a magic cure or tell us what we want to hear. But, we know that the reality is that the longer we wait, the more painful it will be and the less likely the cancer will be cured.