Today there is a great sense of relief
that has swept the nation as news flowed through the media that the
government shutdown had come to an end. After all, during the 16 days
of the shutdown, there was great hardship inflicted on the average
American as the stock market rose by 2.4%, government workers that were furloughed received a 2+ week paid vacation and interest rates fell
from a peak of 2.65% on October 1st to 2.59% on October 17th. Outside
of the financial markets, which were never concerned of a "default," the
reality is that the government shutdown did likely clip up to 0.5% off
of 4th quarter's GDP. While that clip to economic growth created by the
government standoff is temporary - the ongoing persistant weakness of
economic growth is another issue entirely. This is the focus of this
discussion.
The most disturbing sentence uttered
during the debt ceiling debate/government shut down, that should raise
some concerns by both political parties, is:
"We must increase our debt limit so that we can pay our bills."
Think about that for a moment. The
U.S. has become the single largest debtor nation on the planet as
welfare dependency rises, government spending continues to increase and
economic growth slows. However, what is ironic about this situation, is
that it is the continuing increases in debt which is directly
responsible for the decreases in economic growth. The chart below shows
government debt as a percentage of GDP as compared to annualized rate
of change in economic growth.
Since the beginning of 2009 very little
of the increases in government debt, which was used to fill the gap
created by excess expenditures, returned very little in terms of
economic growth. In fact, as of the second quarter of 2013, it required
$5.61 of debt to create just $1 of economic growth.
As I discussed recently in "The Long Game Of Hiking The Debt Ceiling:"
"The chart below shows the current projected rates of debt to real GDP through 2018 according to the CBO estimates versus the current annual run rate of $1.1 trillion."
"At the current rate of debt increase the U.S. will pushing 130% of debt to real GDP by 2018. This is, of course, not including the funding needs that will ultimately be required to support the increased costs of the entitlement programs of Social Security, Medicare and now the Affordable Care Act (ACA). The reality is that debt needs will substantially increase as entitlement programs continue to consume ever larger chunks of the current budget. By 2020 the current welfare programs alone are expected to require 75% of all federal revenues and this does not include the impact of the ACA. This, of course, is unsustainable."
President Obama was very correct in his
speech, following the resolution of the government shut down, by stating
that one of the three things that the government should focus on in the
short term is budget reform. The current pace of increase in the
participation of social welfare programs from food stamps and disability
claims to social security and Medicare is creating an ever increasing
consumption of current revenues. The implementation of another social
welfare program will only create an additional drag on the
revenue/expense equation.
While the President did note that the
deficit was indeed shrinking; this is due to the massive surge in tax
revenue created by the fears over the fiscal cliff. With the final tax
filing and payment date, October 15th, now behind us we will begin to
see the deficit once again widen. This is simply due to the fact that
ordinary tax revenue trails government expenditures by a wide margin.
So, while the government shutdown is now
temporarily behind us, at least for the next 90 days, the real battle
lies ahead. Unfortunately, there is little desire to truly reform
spending or the budget. It requires sacrifices that no one is willing
to make. However, the wakeup call really should be the fact that we are
making the statement that "we have to increase our debt simply to pay our bills."