A Half Century of Bad Decisions

Jeff  Carter
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Posted: Oct 27, 2011 12:01 AM

Name a state or national government that isn’t in some sort of financial trouble. Even the states that are supposedly rock solid financially have underfunded liabilities somewhere on their balance sheet. If they aren’t readily apparent now, a big downturn in the market will cause them to be less obscured by the clouds.

Governments make financial decisions and they have consequences. Shifting money from this to that has costs.

Businesses do the same thing. However, there are contraints on business that don’t exist for governments. The important thing to look at is how a business reacts to severe adversity, and a government.

Governments react by raising prices. Fees and taxes go up. How badly would the market punish a stock that raised prices in a crisis?

Governments react by spending more money. They borrow via the bond market to use money today to stimulate economic activity. Of course, the multiplier effect of that activity is zero, nada, zilch, a goose egg. Businesses restructure debt, cut costs, and lay off workers. They retool the enterprise. They figure out where they are going to get the most bang for their buck, and spend money there. If the resource is unproductive, they kill it.

People will say that governments aren’t like a business, so it doesn’t matter but they are incorrect. Economic opportunity costs run through governments just like they do businesses. Just like the business that buries poor decisions behind shifty accounting, eventually the math catches up to you. Those poor decisions see the light of day and the market punishes them. That’s what is happening to government today.

I would agree with critics that governments don’t produce anything. But they should provide a basis for societal interaction. That means clean water, roads and bridges, cops and fireman. They don’t need to provide much more than that. But economics still rule the decisions they make regarding our most basic resources.

Congress and the President are unpopular. The President is unpopular because he has made some really, really bad short run decisions for the economic vitality of the country. Congress is unpopular because a half century of bad decision making is being shown in budget numbers that have sunshine on them.

If we didn’t have a gigantic economic downturn, governments would have been able to continue papering over their losses. It can’t anymore so we have reached the day of reckoning.

The response by many governments has been abysmal. In Illinois, Cook County’s commissioner just released her budget. It’s increasing fees, cutting some government workers but ignores the real budget problem, pensions and entitlements. The state of Illinois has raised taxes (prices), borrowed more, and not cut spending. The solutions from many at the federal level have been to spend more money and tax more. Politicians are not like CEO’s when it comes to cutting the real fat out of spending.

What should governments do? Think like a CEO. Tackle the big problems that are leaking the most water first-then sell off assets to raise cash you can redeploy into productive activities.

The first thing governments need to do is change pensions. Replace defined benefit pensions with defined contribution pensions. No one is against workers making money for working. But defined benefit pensions can’t be afforded by taxpayers. Mistakes were made by setting up the existing pension system in the past. Just because it’s always been that way isn’t an excuse to keep a poorly structured system. Change it, now.

The second thing governments need to do is privatize assets. Why can’t they sell the bus system to a private company? Why can’t they outsource a lot of government services? The one problem is that when governments do this, crony capitalism ensues. But it’s easier to expose and deal with crony capitalism than governments. At least there is the opportunity to throw the rascals out, or sue the pants off the private company and bring the law to bear.

Businesses sell off unproductive assets all the time. They sell them to other businesses that see value in them, or they just sell off the pieces to try and get some sort of cash flow from them. There are certainly areas of the government we can sell off for scrap.

In the European debt crisis, the US financial crisis, all I am hearing is how we all have to sacrifice. Yet, I am not seeing governments sacrifice at all. Instead, I am seeing the cost of government escalate. We aren’t getting less government, and more freedom. We are getting more government and less freedom.

Governments refuse to pay the price for their poor decision making. Only we the voters can make them pay. But we are running out of time.