The economic landscape is continually influenced by political decisions, particularly during moments of crisis. One such pivotal moment occurred in 2008, when the financial crisis opened doors for expansive government action.
Rahm Emanuel, then Chief of Staff to President Obama, famously stated, “Rule one: Never allow a crisis to go to waste.” His assertion perfectly encapsulated the political environment of the time, as leaders sought to utilize the financial turmoil as an opportunity to implement significant changes.
The subsequent passage of the American Recovery and Reinvestment Act in February 2009 marked a significant political achievement for the Obama administration. It enabled the government to allocate funds to various sectors: infrastructure, healthcare, energy, security, and law enforcement, among others.
In fact, some members of Congress even funneled money into projects that were later named in their honor, a gesture that served to bolster their public image. However, these actions have been criticized as political maneuvers rather than genuine efforts to benefit society.
From an economic standpoint, the Recovery Act proved ineffective. While it led to created debt, it did not yield sustainable wealth or growth. Since its implementation, the U.S. national debt has skyrocketed from approximately $10.6 trillion to nearly $20 trillion.
Squib Kicking the Debt Ceiling Can
Not long ago, we explored the unlikelihood of a last-minute debt ceiling deal. We believed we were insightful in analyzing the situation and followed with an article challenging Mitch McConnell’s stance on the debt ceiling, “calling his bluff.”
This week served as a reminder of the unpredictability in politics. President Trump unexpectedly pushed the debt ceiling debate into the hands of Senate Minority Leader Chuck Schumer and House Minority Leader Nancy Pelosi. This occurred soon after House Speaker Paul Ryan had labeled their proposal as “ridiculous and disgraceful.”
The crisis brought about by Hurricane Harvey, coupled with public support for relief efforts, allowed Trump to take a hasty yet temporary action regarding the debt limit. As December approaches, he might reflect on this decision with regret. Notably, Mitch McConnell stated:
“[The President’s] feeling was that we needed to come together to not create a picture of divisiveness at a time of genuine national crisis, and that was the rationale.”
What comes from this? While U.S. stock markets expressed enthusiasm in the wake of the announcement—DOW, S&P 500, and NASDAQ all registering gains—one must ponder the long-term implications of this short-term solution.
In essence, the extension clarified that the facade of fiscal responsibility often associated with a debt ceiling is no longer considered necessary. Consequently, President Trump is contemplating eliminating the debt ceiling altogether.
The Government Debt Paradox: Pick Your Poison
Among contemporary economic principles, the notion that government spending can stimulate economic growth through debt is widely accepted. Indeed, government expenditure redirects growth towards favored sectors. However, when financed by deficits, such spending can also fuel inflation.
Nonetheless, government stimulus does not genuinely foster economic growth. The reality is, aside from crafting legislation and imposing taxes and fees, the government doesn’t create tangible value.
In fact, it diverts capital into avenues that would not otherwise receive funding in a free market. The government essentially reallocates resources, often leading to endeavors that do not provide value.
For instance, a recent report revealed that a foreign contractor, paid by the U.S. government, amassed a $50 million invoice for luxury vehicles, weapons, and alcohol designed to mentor Afghan intelligence operatives. This raises questions about the investment’s legitimacy and its actual benefits for American taxpayers. It certainly seems to cater to some extravagant appetites at the public’s expense.
Furthermore, initiatives of this nature tend to create dependencies. Some individuals rely on direct transfer payments like welfare and disability, while others depend on lucrative government contracts for their livelihoods.
Over the years, the consistent growth of government debt has distorted the economy. Removing it could lead to economic collapse; continuing on the current path may lead to a financial crisis.
This presents us with a paradox: the reality of government debt and its inherent dilemmas. In this scenario, we must choose our own course. Buckle up; the journey ahead may be tumultuous!
Sincerely,
MN Gordon
for Economic Prism
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