Government Rescues Are Digging A Deeper Hole

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Domestic and global economic data worsened again this week.  Central banks around the world eased further, and today’s weak domestic employment report rekindled speculation that the Federal Reserve would unveil QE3.

Arguments rage long and loud about the wisdom of government stimulus.  The question of what government action or inaction is best for the economy typically concentrates on what would be best over a relatively short time period – from a few quarters to a few years ahead.

Of course, the time frame of most politicians and their appointees is short because of the looming pressure of the next election.  That pressure explains the political compulsion to take any action necessary to avoid recessions, which inevitably unfold in the relevant short time frame.  If we had real statesmen, not political opportunists (in both parties), they would examine a longer time frame.

When observers focus on the shorter time frame, the best government action almost always appears to be more stimulus.  Who doesn’t want additional jobs to pull more people off unemployment rolls?  Who doesn’t want to cut taxes to leave more money in the hands of consumers and investors?  How many would refuse apparently free goodies from the government?  The consequences of the resulting debt typically unfold only over a longer time frame.

If we imagine future generations of Americans without the malevolence of the legendary Sisyphus, but similarly condemned to roll the boulder of debt up a great hill, we must view our generation as the torturer.  Each time we alleviate some of our short-term economic pain, we add to the size and weight of the debt boulder to be pushed uphill.

Very few would consciously place such a burden on their grandchildren and their grandchildren’s grandchildren.  Decisions to alleviate today’s pain may not be consciously selfish.  In fact, they may even be motivated by positive social concerns.  Of course, we want more people to hold jobs and be better able to care for their families.

But are today’s financial woes more important than those that could be our grandchildren’s decades from now?  Do we even have the right to make that decision?  Our fixation with alleviating our generation’s pain, which we and our immediate ancestors caused, is creating what will almost certainly be an unsustainable financial burden on generations to come.

A stark case in point is staring at us from across the ocean.  We are witnessing the collapse of much of the European welfare system, no doubt created with the best of social intent, but without full appreciation that neither individuals nor countries can indefinitely spend more than they earn.

As any number of people who do the math have pointed out, the United States is already well past the point of no return.  We will never be able to fulfill all our financial promises in anything similar to dollars of current value.

Recognizing that recession now might logically precipitate a debt collapse spiral, politicians and central bankers appear willing to increase today’s debt indefinitely and pass the burden on to our heirs.  Of course, we can’t know whether or not markets will remain patient enough to allow us to defer the pain much longer.

We will never solve our debt problems without severe pain.  The primary question is who will bear it.  We have no right to saddle future generations with the task of pushing our massive debt boulder uphill.

I strongly opposed the multiplication of our national debt for the purpose of bailing out insolvent financial institutions four years ago.  Had we not gone through that bailout exercise, the world would undoubtedly have suffered its most catastrophic financial collapse ever.  Bankruptcies and unemployment might well have resembled the 1930s in scope, but we would likely be well on the way to recovery today, admittedly from a far lower economic level.  Overextended debtors would be wiped out.  Creditors who failed to appreciate the need for due diligence would be severely hurt.  Our financial foundation, however, would have been reset and solidified in a far less leveraged condition.  Moral hazard would have been banished for generations.  And future generations would rightly be spared the burdens of Sisyphus.  As it stands, a 1930s style depression could still lie ahead if a debt collapse unfolds with the even greater levels of leverage that have been added through the rescue programs of the past few years.

All current indicators point to more government stimulus and debt creation immediately ahead.  To prompt a change of direction, we ought to fight vigorously for term limits. Only then might politicians think in a longer time frame if they’re freed from the constraint of a constant quest for reelection.