Two Options

Unemployment is high and getting higher. Some say national unemployment may soon reach 10%. It is well known that national unemployment data understates the problem as underemployment, reduced hours and illegal immigrant labor are not factored into the equation. Even though this is true, the reported unemployment numbers are high enough to be a major cause for concern.

What then is an administration to do? There are really two paths: (1) the administration could implement business-friendly policies such as low taxes and reduced government intervention to make the US more competitive globally and in so doing, boost small and large businesses to the point where new jobs will be created locally, or (2) boost government benefits and handouts, extend unemployment insurance, kick in new subsidies for purchasing homes and cars, and otherwise alleviate the pain of a suffering economy.

The problem is that these solutions are mutually exclusive, you can’t do them both. Efforts to increase government spending to “stimulate” the economy or otherwise alleviate the negative effects of the current downturn are not affordable because as it stands, the Government spends more than it takes in. Therefore, the only way to pay for these handouts and bailouts would be to raise taxes, borrow more money, print more money or some combination of these three options. Each of these three options, however, will serve to stifle job growth and perpetuate the economic downturn. This is because increasing taxes makes it harder for US businesses to successfully compete globally and makes it more likely that fledgling businesses will fail under the increased demands of government taxation. Borrowing more money may cause some alleviation of pain in the short term, but this money must be paid back with interest. Thus we are trading an amount of pain today for twice as much pain tomorrow. Printing up more money is perhaps the worst solution of them all. At first, the effects of printing up money would be to prevent the natural reduction in prices during the economic slowdown. As reduced prices increases individual wealth and ultimately helps to reignite economic growth, increased printing of money keeps prices stable even when people are losing their jobs, having hours reduced and are otherwise forced to make less money than they would have otherwise. The Government would have us believe that deflation is bad, but common sense tells us that lower prices are better for consumers. Moreover, as the rate of economic contraction ebbs, that is to say, the rate of new layoffs slows, as must happen once businesses cut payroll as far as it can go, inflation will set in and prices will rise swiftly thereby continuing the pain even after the pace of new layoffs slow.

Accordingly, the two options listed above come down to a trade off between short-term pain and long-term gain. You can reduce short term pain at the expense of long term gain, but you cannot simply send the economy into recovery by spending money that you do not have. It would be great if you could, but you can’t. If you could then there would be no such thing as a poor country because a poor country could always spend itself into prosperity. This makes sense. The way to sound finances is fiscal responsibility and living within your means. Spending more than you have may make you feel better today, but it is guaranteed to make you feel worse down the road.

Our nation is addicted to debt. We are suffering from debt withdrawal. We can increase lending to ease the pain only to find ourselves back in withdrawal down the road or we can reduce our borrowing and emerge better for it after a period of pain. This was the situation George W. Bush was facing in 2001 and his choice was to increase the debt dosage and continue the party. Today we pay for this bad choice with pain that is worse than what it would have been if the recession of 2001 were to have been allowed to play out as it should have.

It is clear that Obama is hoping to do what George W. Bush did and kick the can down the road. Maybe he can do it or maybe we have reached the end of the road.