Mortgaging Our Future

Remember the economy just before the stock market bubble burst? Jobs were so plentiful that fast food joints were offering signing bonuses and one tech interviewee actually invoiced a prospective employer for the time he spent interviewing with them. With skyrocketing stock prices, we were feeling flush and believed we could do anything.

Well, would you believe that the economy has grown faster in the past two years than it did in the two years leading up to the stock market peak in March of 2000? Yep, adjusted for inflation, gross domestic product has surged 8.9 percent in the past two years versus 8.5 percent in the two years ending in March of 2000. So why do things feel so unsettled today compared to five years ago?

For one, we’re coming off the sluggishness early in the decade. We’re at war, for another. But I think the real reason is far more fundamental – and here is where I put my economist’s hat on.

Not to generalize too much, but there are generally two schools of thought on government deficit spending. To fight off recession, you can increase spending to generate demand or cut taxes to spur private spending and investment.

We’ve used a combination of these two policies – increased government spending AND reduced taxes. In the process, we ran up record government deficits, excluding Social Security surpluses, of almost $600 billion in 2004. Meanwhile, our trade deficit – the difference in how much we import versus how much we export – was a little over $600 billion last year.

So what we have is a government that provides us with $600 billion in government programs and services for which we’re not paying (at least not yet). Then we go and spend that $600 billion on stuff overseas. Essentially, we are financing a huge foreign shopping spree, with the feds as the credit card company. Granted, it’s far more complex than that, but bottom line, the amount we borrow to fund the government is about equal to our excess overseas purchases.

The end result is that the deficit spending that economists say should boost our economy is doing as much, if not more, to create jobs in China, Korea and India as it is to create jobs at home. We don’t feel it materially because our lifestyle is being maintained by this government-funded foreign splurge. But we feel it psychologically, as evidenced by consistently low consumer confidence surveys. Perhaps deep down we realize we’re spending our future rather than investing in it.

The real danger is that our foreign trading partners are the ones funding our federal deficits. They use the cash they get from us to buy U.S. government securities. They essentially sell us stuff, then loan the money back to us to buy more. What happens if they decide they have better things to do with their money?

I have no problem borrowing to finance a house, business or asset that will provide a future return on investment. But I believe it’s unwise to finance a lifestyle. Yet that seems to be what we are doing as a society. It’s a message no politician will ever give, but at some point we are going to have to sacrifice the boat, big-screen TV or some government services and start paying as we go. Otherwise we could find ourselves sacrificing something much more precious – our future.