Ramblings on Government Debt-Are we in need of a paradigm shift?

The governmental budget has always been an important part of public discussion. After the 1970’s and 80’s the amount of publically held debt rose from around 35% of GNP to almost 75% of GNP today. According to a new report by the Congressional Budget Office that debt will exceed 100% of GNP in 25 years. Growing debt and lack of sustainable fixes might be one problem related to not having a paradigm shift on institutions and spending. 

Government has a responsibility to use money wisely in order to enhance the lives of people and encourage the longevity of fundamental American values. When institutions take on an existence of their own and fail to change, they also neglect meeting their fiduciary responsibilities to the American public. Each wasted dollar is a dollar that can’t be used for the greater good of the nation. 

The growing deficit should be a concern for all Americans as our and our children’s livelihoods rest on the ability to ensure government is sustainable and accountable long into the future. Each generation has its own challenge and leaves a legacy for the next generation. Our legacy is one that carries the weight of unsustainable spending for the last 40 years that may very well impact the next 40 years.

Without fundamental changes in the way we think this debt will rear its ugly head in the future bursting pension funds, raising interest rates, collapsing municipalities, high student loans, drowning state budgets and leaving the lives of people shattered.  Public perception of government will change based upon its ability to reign in the monster sleeping under our beds. 

There are fundamental differences in perception of those who receive direct benefit from government spending and those who do not. Organizations that enjoy the financial benefits of large government spending through contracts, grants, wages, and resources have a vested interest in ensuring that government continues to spend and spend big.  Those closest to government have little incentive to change it.

Those outside of government may view spending as excessive and want justifications for government programs. Running a deficit year after year without attempting to change seems antithetical to growth and development. More spending means the next generation will have to pick up the slack where we left off. One has to wonder where the “buck stops here” in this mass dispersion of responsibility. 

The problem isn’t that anyone is trying to waste money but that people do not understand the consequences of improper resource allocation.  Without net positive of government functions the system will continue to amass large amounts of debt making it more difficult to operate, adjust, and be effective in the future. When financial resources are needed to avert disaster they won’t be there without the risk of default. 

To solve budgeting problems requires a fundamental paradigm shift about why these institutions have developed and the need to keep them updated for efficient effectiveness.  Money should not be flowing without some gauge of the institutions performance. When programs don’t work they need either a major overhaul or should be discarded as a drag on society.  Tough choices many politicians are not willing to make because the stakes on their careers from special interests are too high.

Government spending comes with responsibilities that include evaluating that programs are meeting their objectives; ensuring evidence is supporting these programs, and they are updated to reduce the drag on society. When money is used wisely that money can be used to reduce debt or focus on other important aspects of national growth.  Being in an elected position comes with responsibilities to a wider group of stakeholders. That requires thinking beyond the short-term to something more sustainable.  

https://www.cbo.gov/

Is GDP the Best Measurement of Economic Growth?

Numbers are only representations of ideal states and are in and of themselves subjective to what they measure. A paper by Stow & Stow (2013) discusses some of the fallacies of relying too heavily on Gross Domestic Product (GDP) without considering the deeper meaning of the numbers. Fallacies of judgment can occur when governments adjust their economy to improve upon GDP but don’t look at actual economic activity.

GDP is calculated by adding =C+I+G+NX. Any improvement in consumption (C), Investment (I), Government Spending (G) and Net Exports (NX) would result in an improvement in overall GDP. The numbers could be misleading in the long run and lead to poor policies decisions.

When consumers spend more money they are not necessarily improving total wealth of the nation even though GDP rises. They are simply spending their money, dwindling their savings, buying now instead of investing later, and taking on debt. They may be encouraging organizational profits but not exclusively the wealth of the nation as an entire economic system. 

A similar fallacy can be found in government spending where an increase in expenditures can raise GDP numbers that don’t actually reflect national growth. Spending more today has obvious costs in terms of debt, flexibility, and confidence that are not calculated into the factor. Spending should be in areas that improve overall wealth or reduce liabilities. 

The paper is solid in the sense that numbers are only just numbers and relying on them too heavily can lead to policy mistakes that can be costly down the road. Overreliance on a single number encourages greater government spending and interventionism that can be self-perpetuating as politicians seek to justify new and expanded budgets at the detriment longer term sustainability. Using a battery of different numbers can help provide a greater context more data points to understanding true growth and development. 

Strow, B. & Strow, C. (2013). Gross Actual Product: Why GDP Fosters Increased

Government Spending and Should Be Replaced. The Journal of Private Enterprise, 29(1)

Improving Consumer Confidence and 3.5% GDP Comes with a Warning

The economy took a jump from July to September as Gross Domestic Product (GDP) calculations rose 3.5%. This is great news for those hoping to finish off the last of the recession and move onto more prosperous times. This improvement is the largest in a single quarter since 2003 and parallels higher levels of consumer enthusiasm. Positive news also comes with a warning to redirect focus to balancing budgets, encouraging long-term economic growth, and reducing income disparity.  

To add to this positive news the University of Michigan’s consumer confidence index also jumped to 86.9 in October when compared to 84.6 in September.  With GDP expanding and consumer confidence rising few can argue that the world’s super power isn’t regaining economic ground. 

Measuring economic growth often rests on imperfect numbers such as GDP that can create improper assumptions among decision-makers. GDP is seen as the total market value of the goods and services produced by a nation over a certain period (Kolb, 2008). That number includes all final goods and services generated by economic resources within a nation. 

GDP product doesn’t consider the production of American citizens but any business or entity that works within a nation. It is an important distinction, as the global world can allow companies to do business within the U.S., but be owned by foreigners that still contributing to local growth.

Despite its wide reaching use GDP is not a perfect measurement. There is a fundamental difference between wealth creation and increased production. According to Strow & Strow (2013) GDP can encourage lawmakers to push for increased government spending but ignore wealth creation as a primary function of economic expansion. 

As an imperfect measurement the improvement of GDP and increasing consumer confidence are positive markers for the potential of future growth. Growth years are also times when the strategies of lawmakers and business leaders should also change to make such growth long lasting. Unfortunately, too many wait until another crisis occurs before refreshing their thinking.  

When the economy improves officials sometimes focus on maximizing additional spending to balance old budgets and encourage pet projects. With the ending of unprecedented government asset purchases, historic low inflation, and a few deficit improvements it is important to focus on reasonable budget reduction plans, improving economic trade conditions, and the reduction of income disparity. The underpinnings that lead to growth should not be ignored for short-term budget advantages.

Kolb, R. (2008). Gross Domestic Product (GDP). Encyclopedia of business ethics and society. 

Strow, B. & Strow, C. (2013). Gross actual product: why GDP fosters increased government spending and should be replaced. The Journal of Private Enterprise, 29 (1).

San Diego Golden Fleece Awards 2013

On an annual basis the San Diego County Taxpayer Association (SDCTA) holds an event to honor the best and worst in tax spending associated with local government.  This year’s event was held at the San Diego Marriott Marques Hotel and Marina on May 9^th, 2013. The organization focuses on government efficiency, accountability, and decision making abilities of local leaders over the past year. The event draws a large crowd and sponsors due to its inherently interesting information and context. It is hard to know who is going to get a flower and who is going to get a boot. 

The association spends a great deal of time crunching numbers and reviewing public spending. Through this number crunching they often find hundreds of millions of dollars of wasteful spending. They make their nominations for the Golden Fleece awards and call out such organizations by name. Their approach appears to be somewhat bi-partisan in its methodology which may be one of the reasons why it is so popular.  The prize was a small stuffed sheep.

It is these groups like this that hold local government responsible for how it spends taxpayer money. There were some great suggestions leaders should come away with. One of these lessons was to tie the debt to the life of the purchase. For example, the buying of electronic systems for children’s education should not have a repayment plan that spans out  into the future over the life of the product because costs may explode 8 or 10 times the value of the investment.  The same concept applies across many other purchasing areas.

The other lesson was more positive in terms of its outcome. By finding efficiencies in local government it is possible to save a lot of money. The example provided was a call box that was moved to the San Diego Association of Governments. The total savings were around $4 million dollars that could be used for other needed purchases or spending requirements. 

It is important for governmental leaders to understand that the money they spend is not theirs. They are only stewards of that money and have the highest responsibility to make sure it is spent wisely. When people are elected their greater responsibility becomes to the community versus the needs of one's social group. When these interests coincide that is great but when they do not an ethical choice must be made. A true leader can make that choice.

 

More importantly, it is necessary to look at each governmental entity to ensure that they are proper stewards of the people’s money. If we were to expand the wastes or potential savings across the nation it may have a huge influence on our economic viability. Practical spending and potential solutions are key elements of management and leadership. Every governmental entity can find something beneficial to change. Yet that change must first come from the way we think and then how we see our responsibilities.  

On a less serious note there were some great prizes offered for raffle winners. Sports box seats, vacation, Sea World tickets, a wine set, and much more. I had my hopes set on the $1,500 wine set but....lady luck was not with me. 

If you would like to join SDCTA please click HERE

Further Reading:

Nominations

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