Can Businesses Bailout the Government? – Part 1

With all the talk about government bailouts and handouts, we forget that business is the engine of our economy.  July unemployment numbers show unemployment is steady even though overall we lost jobs.  Only with government double-speak and fancy statistics can a loss of jobs be steady unemployment. I know there are factors like people giving up looking for work, and so on.  Oh, and by the way, the June numbers were “adjusted” downward, so whatever good we thought might have been last month is probably lost as well.  Now, it is true that most of the July jobs lost were government census worker door-knocking jobs, so some of this downturn was expected.  The good news?  Private sector jobs were up.  Not by a lot, mind you, but up none the less.  So, can business bail out the government in these tough economic times by hiring people?

Floyd Norris writes in the NY Times about this very topic. In his piece he explains how the “standard” economic measures don’t work.

We need to take a realistic look at the metrics the economists use to decide if a country is in fiscal trouble or not.  It’s easy to use the traditional formula where we measure national debt as a percentage of the Gross Domestic Product, or GDP.  The GDP is a measure of how much the country produces.  This debt-to-production ratio is similar to how a mortgage company decides if you can afford a house.  Your mortgage payment should not exceed a certain percentage of your income (maybe we should call it your Gross Personal Product).  In like manner, the debt should not exceed a certain percentage of the country’s income.

An interesting (read that “scary”) observation is that our GDP and national debt are projected soon to be within 10% of each other.

Sadly, if the debt rises faster than the growth in the economy, you head for trouble.  Just ask Iceland, Portugal, Greece and other countries that found themselves in a similar situation.  So what can we do?

If anyone looks at government fiscal policy, it becomes apparent that some of our elected officials simply want us to spend our way out of debt.  Think about that.  Spend more money and get rid of debt.  Try that with your credit cards and see how far you get.  But, in the lopsided logic of government, take money we don’t have and give it to businesses that have proven themselves to fail at money management.  The hoped-for result is that these companies will wake up and use the money properly and bring us back to prosperity.  Do I really have to take time and make you read why this is not exactly a good policy?

On the flip side of that coin, if we can’t spend your way to financial freedom, perhaps we should raise revenue and tax our way out of debt.  Many people think that Tax Day is April 15th.  In reality, in 2010 it came on April 9th.  That’s the day when the average US citizen earned enough money to pay his or her federal, state and local tax obligations.  It varies from state-to-state.  My own state is April 7th with Connecticut being the latest at April 27th and with New York and New Jersey, not surprisingly not far behind.

I have two thoughts here.  First of all, this means that the various government entities to which we are subject have required us to work three months for them with no appreciable benefit to ourselves.  Does this not sound like forced labor or indentured servitude?

Second, as a word of warning, with the national debt rapidly approaching $14 Trillion, the taxes needed just to service the debt (think of that as paying just the interest and not the minimum payment on your credit card each month) will cause that date to get later and later each year.

So, if we can’t spend our way out of financial ruin and can’t tax the people enough to do it, can we borrow our way out of debt?  Many tried that with home mortgages a few years ago.  They bought houses they couldn’t afford with the “promise” that housing prices would always and forever go up so within just a few short years they’d be making money when they sold their houses.  Many also borrowed more than 100% of the price of the home to make the improvements it needed.  Now they’re upside down on their loans, owing far, far more than their collapsed value of the home.  And, of course, they’re crying for nanny government to bail them out with your money.  It’s not just home mortgages.  It’s also home equity lines (if you home has equity), car loans, boat loans, student loans, credit cards, and the list goes on and on.  You have only so much debt that you can accumulate.  The same is true of governments.  When other countries refuse to extend the US credit, the bottom will fall out so much farther than anyone in government and the media will admit.

Governments don’t produce anything, regardless what the GDP calculations say.  They consume.  It is foolish for us to think that government can solve this fiscal crisis.  It’s up to businesses and “We the People” to do it.

I’ll discuss that in Part 2.