Roundabout

Posted by on 08/03/09 in America, Debt

Two years ago, my wife Amie and I rented a car—a manual transmission Vauxhall no less—in downtown Edinburgh, Scotland. Over the next four days, I inadvertently whacked a few mirrors, skittered along the edge of single-track roads while locals blew by, and mastered the ubiquitous roundabout. Only once was I forced to circle a roundabout twice before finding and confidently taking the correct exit.

Which brings me to a circular story: Nation Public Radio reported this weekend that Treasury Secretary Geithner suggested the country may need to extend unemployment benefits because companies are not hiring as much or as quickly as expected. Concurrently—and here is the circle—he also expressed his concern about the rising deficit, implying according to NPR that tax increases are imminent. Of course, these would be tax increases in excess of those already baked into the various health care proposals under consideration. And they would come while our state and municipal governments are striving to generate additional revenue, to say nothing of the nonprofits that require and deserve our support during a difficult time.

It’s quite logical that when it costs more to employ people in a difficult economy, unemployment increases. It would be interesting to see formal proposals on the table that make it easier for businesses to hire new employees or rehire those they have recently let go.

What about the stimulus? Isn’t that the ticket out of this mess? Doesn’t the stock market reflect increased confidence in the current spending plan? We would argue that the recent bounce in equities is due in part to rebounding from the “oversold” status of this past February/March and in part to severe cost cutting (read: layoffs) that have caused a one-time spike in net earnings that may not be sustainable, particularly for those businesses that are cutting bone and muscle.

Our primary concern with the long-term effectiveness of the stimulus is that, we, the citizens of the United States, have funded our current stimulus almost entirely with problematic, externally-financed debt. The debt is largely funded by other countries more so than by our own citizens; we have no timetable for repaying the debt; we lack the means to actually pay it back; we are weakened diplomatically by our debt; and, we aren’t even sure if the debt will stimulate sustainable economic growth. When we built the railroads and then the highway system, American taxpayers loaned money to America. That is not the situation today.

We would have less of a concern with a stimulus funded by government cash reserves. After all, strong businesses and countries fund their expansion through spending some of their cash (or equity). China and India are providing that example as they invest their hoards of cash on infrastructure so that their countries can perpetuate their economic growth. The United States? As a government, we don’t have cash anymore. We haven’t for some time now.

Our situation reminds me of those roundabouts in Scotland, where you had to be confident, but you also had to know where you were going—before you turned.