It’s time to cut our dependency on other people’s money

President Barack Obama’s budget is a good fit for the dysfunctional fiscal policy process. By most accounts it is a totally meaningless document, which even the U.S. Senate isn’t likely to take seriously.

From a practical, legislative standpoint, the critics are right. After the usual commentary period is over and the news media and pundits have kicked it around, this budget will probably be filed away, of interest only to the dust bunnies.

Given the fractious Congress, which knows a thing or two about dysfunction, the president has decided to ignore the financial and economic implications of the budget and treat it as a kind of mission statement for his administration.

Under the circumstances it’s hard to fault the president for that. It is possible that a more realistic and thoughtful budget, combined with a heroic level of leadership, tact, and persuasion could have produced a more effective yet realistic federal budget, but it would have been a long-shot. They always have been.

The key to the budget as a statement of policy is in the president’s own words. When he introduced the budget at a rally held at the Northern Virginia Community College campus in Annandale, Virginia, he said that we “can’t cut our way to growth.”

There is much truth in that, and it is something that businesses and individuals often forget when they are dealing with a financial crunch. However, it is equally true that we can’t spend our way to growth, either, especially with money we don’t have.

There’s an old saying among economists that, “the reason socialist governments fail is that eventually they run out of other people’s money.”

We don’t have socialism in our country, but we do have a large federal government that is growing rapidly in scope and extending its power and reach into more dimensions of our lives. This growth has sponsored an expanding economic dependency on government programs and payments – by both businesses and individuals.

The growth hormone behind this expansion of government is OPM, Other People’s Money. Over the past few decades some of it came from foreign governments, especially the central banks of our trading partners in Europe, China and Japan. Since the recession, some came also from safety-seeking investors and some from the magic of our banking system.

The neurology behind our OPM addiction is not very complicated. The nature of democracy is that politicians do what they have to do in order to get elected to office. While this process is not always something of flawless beauty, it serves a noble purpose: reflecting the will of the people in our collective action through government.

Just as a human brain or body can malfunction and, for example, manufacture too many white blood cells, an economy on OPM can become locked into a self-destructive pathology. It brings to mind an updated version of the old War on Drugs ads showing first an egg then a scrambled egg: “This is democracy. This is democracy on OPM.”

Government payments unavoidably create dependencies. As dependency expands, each election cycle finds politicians facing an electorate that increasingly likes government payments and dislikes taxes. To get elected, then, many candidates take a dose of OPM, rationalizing it with the political version of “I can handle it.”

Eventually the economic dependency of the electorate reaches a point, as it has in some European countries, where no politician can be elected without promising to continue and expand government programs — in effect, pledging allegiance to OPM and sealing the country’s fate.

We saw this most clearly in Greece, which remains on the brink of default and economic collapse. We saw it in the ouster of Italy’s Silvio Berlusconi, who, despite his personal behavior flaws, had at least attempted to get Italy into rehab to treat its OPM addiction. Similarly, French President Nicholas Sarkozy endured street riots and now faces a difficult election over his efforts to address France’s unsustainable entitlement programs.

The rationalizations sound increasingly like the denial phase of many addicts. When President Obama says, as he did in Annandale, Va., “We can’t cut back on those things that are important for us to grow,” he’s not wrong in the particular, but he is still mistaken. He should have been explaining his priorities, but instead he was justifying the increased use of OPM. And the “we can’t cut back” part is all too familiar to debt counselors, business consultants, and economists. Personal, household, business and government budgets of the bankruptcy-bound are filled with things that can’t be cut.

It’s really too bad that once the “gotcha” period is over the president’s budget will be contemplated mostly by dust bunnies. It contains the determinants of our future. We should talk about this stuff.

James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Snohomish County Business Journal.

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