by Phillip Torsrud
While there is a lot of good in the stimulus package President Obama signed, it is doomed to failure because we haven't learned our lesson from the Greenspan era. Former Federal Reserve Chairman Alan Greespan was worshipped by press and politicians during his tenure from 1987 to 2006 because he focused on making the economy look good in the short-term. There was no consideration for the future consequences of his policies. Accumulation of massive debt was part of a "new" economics that was not subject to any previous economic rules. The simple rules of math have rebutted this nonsense with a vengeance.
To simplify, if there are only one hundred pieces of gold in an entire economy and fifty are out being exchanged, and the other fifty are in the bank, how much interest can bankers expect for lending their fifty? With all the new debt instruments, bankers expect over time to receive more than the one hundred pieces of gold that comprise the entire economy. Naturally, it's only a matter of time before people can't pay their mortgage. This has happened over and over throughout history and is the reason why money lenders have been hated and blamed for the destruction of nations. Sadly, it has also been used as a justification for anti-semitism.
One of the most crucial elements of our current mess is the lost trust that Wall Street will suffer as a result. It was believed that our system was transparent and governed by a rule of law, therefore the rest of the world was eager to invest in America. This paid huge dividends in that at times it takes billions of dollars in venture capital to create a new, global business. This allowed American businesses the credit required to grow our economy to levels that were envied by the rest of the world. The destruction of confidence in America's financial system will have a long-term impact on the economy. The consequences for state and federal governments is a significant loss in tax receipts. Therefore, sustaining current spending levels will result in the accumulation of massive debt.
The biggest failure of the stimulus package is that it does not require states to cut spending so that they won't need another bail-out in two years. States need to understand that we have just undergone a major shift in our economic system. What is happening now was years in the making. After the .com bubble burst, there was also budget shortfalls across the nation. Then came the housing bubble which only led to the delay of states addressing the impact of lower tax yields on their budgets.
With the housing bubble popping, and the subsequent recession, states should have been required to cut spending so that they can balance their budgets when the money from the stimulus package runs out. As is, the stimulus package makes no requirements for states to begin addressing their fiduciary responsibilities. This is the root of our entire economic problem!
For political purposes, it is easy to blame everything on the economy. While it has been easy for our current generation of leaders to ignore their responsibilities, future generations will not be able to ignore the consequences of their ambivalence. While Republicans now call for cuts in spending, they have failed to specify where those cuts should occur. This inability to expand beyond a basic idea is one reason they are no longer in power. Democrats on the other hand are using the Trojan Horse of education to avoid making tough decisions.
As it became clear that states needed money, the children were pushed out front and center under the chopping block as the first potential victims of spending cuts. Not one journalist questioned why Governors would choose education as the first to suffer when there is so much waste in other departments.
Education is now used as a political tool for states to blackmail the Federal Government out of more money. Since the main reason people pay property taxes is to support public education, where is all that money going? While the bursting of the housing bubble did take a sizable chunk out of that funding, those revenues were inflated over the past decade. Just because spending increased at the same rate as the bubble, doesn't mean that level must be sustained. It can't. To do so we'd need property levels to return to their peak.
Restoring growth to public financing will be a hard, long-term process. Recognizing our lower growth rate should at some point impact government spending. It would be kinder for the Governors to spit in the face of every child in their state, than to pass on the hardships that will result from increasing the debt that they must pay. Since the stimulus package failed to clarify what would be expected of the states in return for this rescue, President Obama needs to publicly state that this is the last state bail-out package. If the states can't manage their own finances, there is no justification to provide more money for them to waste.
To read more of Phillip Torsrud's blogs and books, please go to www.crimeandculture.com.
