Ramblings on Government Debt-Are we in need of a paradigm shift?

The governmental budget has always been an important part of public discussion. After the 1970’s and 80’s the amount of publically held debt rose from around 35% of GNP to almost 75% of GNP today. According to a new report by the Congressional Budget Office that debt will exceed 100% of GNP in 25 years. Growing debt and lack of sustainable fixes might be one problem related to not having a paradigm shift on institutions and spending. 

Government has a responsibility to use money wisely in order to enhance the lives of people and encourage the longevity of fundamental American values. When institutions take on an existence of their own and fail to change, they also neglect meeting their fiduciary responsibilities to the American public. Each wasted dollar is a dollar that can’t be used for the greater good of the nation. 

The growing deficit should be a concern for all Americans as our and our children’s livelihoods rest on the ability to ensure government is sustainable and accountable long into the future. Each generation has its own challenge and leaves a legacy for the next generation. Our legacy is one that carries the weight of unsustainable spending for the last 40 years that may very well impact the next 40 years.

Without fundamental changes in the way we think this debt will rear its ugly head in the future bursting pension funds, raising interest rates, collapsing municipalities, high student loans, drowning state budgets and leaving the lives of people shattered.  Public perception of government will change based upon its ability to reign in the monster sleeping under our beds. 

There are fundamental differences in perception of those who receive direct benefit from government spending and those who do not. Organizations that enjoy the financial benefits of large government spending through contracts, grants, wages, and resources have a vested interest in ensuring that government continues to spend and spend big.  Those closest to government have little incentive to change it.

Those outside of government may view spending as excessive and want justifications for government programs. Running a deficit year after year without attempting to change seems antithetical to growth and development. More spending means the next generation will have to pick up the slack where we left off. One has to wonder where the “buck stops here” in this mass dispersion of responsibility. 

The problem isn’t that anyone is trying to waste money but that people do not understand the consequences of improper resource allocation.  Without net positive of government functions the system will continue to amass large amounts of debt making it more difficult to operate, adjust, and be effective in the future. When financial resources are needed to avert disaster they won’t be there without the risk of default. 

To solve budgeting problems requires a fundamental paradigm shift about why these institutions have developed and the need to keep them updated for efficient effectiveness.  Money should not be flowing without some gauge of the institutions performance. When programs don’t work they need either a major overhaul or should be discarded as a drag on society.  Tough choices many politicians are not willing to make because the stakes on their careers from special interests are too high.

Government spending comes with responsibilities that include evaluating that programs are meeting their objectives; ensuring evidence is supporting these programs, and they are updated to reduce the drag on society. When money is used wisely that money can be used to reduce debt or focus on other important aspects of national growth.  Being in an elected position comes with responsibilities to a wider group of stakeholders. That requires thinking beyond the short-term to something more sustainable.  

https://www.cbo.gov/

Are Lower Fuel Prices Acting Like an Economic Stimulant?

Fuel prices are heading downward to the merry of consumers and corporations alike. At the pump are some of the lowest prices we have experienced in over four years. Low fuel prices are not only helpful for families trying to balance their budgets but also businesses that benefit from lower costs of building, manufacturing, and distributing products. Low fuel prices could potentially have a positive influence on economic growth in many of the same ways as a stimulus.

Consumer Disposable Income: Fuel is an expense that families must pay in order to get to work, drive their kids to school events, or go to the grocery store. Families may cut back on traveling in lean years but generally rely on their automobiles for daily errands. When fuel prices decline the amount of money families must spend also declines creating greater disposable income for purchasing other products. 

Lower Business Costs: It costs companies to truck products from one location to the other. It also costs business to run lights, equipment, and other aspects of their operations. Lowering fuel prices also lower costs on everything that is included in the process of obtaining resources, manufacturing items and distributing. 

Acts as a stimulus: Lowering energy and fuel costs is one way to encourage businesses to grow and development. The rewards are exclusively held within the country even though international consumers reap benefits from cheaper American products. Just like interest rates encourages investment so does lower business costs that way on profit margins. 

A study by Aucott and Hall (2014) analyzed the effect of the price of fuel on GDP from 1950-2013. Their study included fossil fuels and nuclear ore on the growth of the economy. They found that the cost of energy has a significant impact on national growth. If the percent of GDP spent on fuels rises above 4% there are implications for slowing economic growth. 

Consumers may be happy with the lower gas prices but companies are also clicking their heels. The more their businesses are tied to the cost of fuel like the airline, manufacturing, and distribution industries the happier they are. Lower fuel costs act like a mild stimulate on the economy that encourages businesses to expand operations and consumers to get out of the house and spend. 

Aucott, M. & Hall, C. (2014). Does a change in price of fuel affect GDP growth? An examination of the U.S. data from 1950-2013. Energies, 7 (10).

Can the U.S. Be an Export Nation in a Difficult International Economy?

The IMF says the global economy will grow slower than expected this year while another recent announcement states that China superseded the U.S. in terms of purchasing power this year. Both are game changing events in what appears to be a long played out economic drama. Even though the news is not positive it does provide an opportunity for the U.S. to focus on improving its infrastructure to lower costs and retool for better managing international markets.  

Slower International Economic Growth:

International markets are expected to experience slow growth in the near future according to an October 7th report by the International Monetary Fund (IMF). The IMF initially thought the world economy may grow as high as 3.7% this year but have revised that number down to a weaker 3.3%. The slowing economy could make it more difficult for companies that are trying to export overseas to locations where the economy is lack luster.

Growth in advanced economies and emerging economies are widely different. Advanced economies should experience a 1.8% growth rate this year and a 2.3% growth rate in 2015. Emerging economies are expected to have a higher rate of 4.4% based upon their riskier investment portfolios.   Companies are attracted to the cheaper and more lucrative emerging economies for new investments.

The IMF argues that one of the difficult challenges facing economies is the ability of countries to enact reform and change to improve upon their competitive positions. Countries should select which changes are needed and beneficial and then move down the path of change to make things happen. Political capital and the ability to share objectives will naturally have an impact on the success of reform efforts. 

Chinese Wealth and Influence:

The IMF states that China’s economy is larger than the U.S. in terms of purchasing power (1). China has surpassed the U.S. on purchasing power parity (PPP) meaning that once the Gross Domestic Process (GDP) is adjusted the Chinese have significant purchasing strength in the global market making them more influential than in the past. They have become a direct competitor and market changer.

National wealth creates influence among business stakeholders. When national wealth is high countries are able to better bargain for deals, influence international stakeholders, and obtain the resources needed to adjust and be more innovative. As China rises on the international scene a new alternative takes shape which becomes viable for nations seeking the best deal between two large economic countries (U.S. and China). 

Needed Improvements:

A slower international economy and a more powerful China is not the end of the game. It provides an opportunity for the U.S. to direct its efforts toward implementing its own growth oriented strategies to draw investments and improve the overall economic functioning of the nation. When difficulties arise decision-makers are encouraged to put down petty differences and focus on solutions through collaborative problem-solving.

Economic hubs act similar to emerging markets but have the additional benefit of being within a more stable national economy. Their growth potential as a localized entity is higher than national rates but can also influence those national rates. Emerging technology and manufacturing hubs are prime examples of flush investment and growth opportunities that have not been fully explored. 

Within the U.S. there are examples of hubs that developed organically through like-minded stakeholders. Understand where these hubs are located, encouraging mutual development within these hubs, and creating awareness of investment opportunities has a long-tail impact on the national economy. As hub members become more innovative they will naturally export products and raise their income opportunities by drawing in more investment interest to feed their growth. 

The point between A and Z has many stops and twists along the path. At times we have become our own worst enemies in the sense that other considerations beyond the health of the nation regularly take precedence. We must only look at the political spectrum to see this distraction at work. Americans desire employment opportunities and this comes through building ground-based products and services that have international penetration. Government should move upwards in its development to lower costs, empower local economies (i.e. hubs and clusters), reduce debt, improve infrastructure (i.e. how hubs interact on a national level) and focus on founding fundamental principles that encourage basic human motivation. 

IMF Report

Does Improvements in Consumer Sentiment and GNP Indicate Future U.S. Growth?

The University of Michigan recently announced improvements in consumer sentiment from 80 in March to 84.6 in September (1).  Consumers who have been frugal with their pay checks over the past may now be willing to open their wallets. Increased consumer spending matched with improvements in Gross National Product (GNP) could be a good sign for the economy. 

Consumer sentiment and sales are two different things but certainly positive impressions today can lead to increased sales tomorrow.  According to Gelper, et. al. (2007) positive consumer sentiment is followed by increased purchases of products and services in the trailing 4-5 months. They argue that consumer sentiment maintains some predictive power over consumer spending. 

Another complementary announcement by the Commerce Department posted a rise in Gross Domestic Product (GDP) to 4.6% (2).  Positive GNP numbers were realized from personal consumption expenditures, exports, private inventory investment, state and local government spending, nonresidential fixed investments, and residential fixed investments.  

Consumer sentiment does have an impact on GDP. Negative consumer sentiment can lower GNP and positive consumer sentiment can raise GNP even though they are not associated with traditional market fundamentals (Matsusaka & Sbordone, 1995).  Contrary to popular opinion, consumer sentiment is strong enough to influence a 13 to 26 percent variance in GNP. 

Together these numbers support the idea that growth in consumer spending is more likely over the next few months. A short lag is not necessarily a bad thing if consumer spending also prompts American manufacturers to invest more in their operations to fulfill consumer needs and further strengthen GNP. It is possible that long-term exports could rise as U.S. based companies find parity with low cost foreign providers. 

Gelper, et. al. (2007). Consumer sentiment and consumer spending: decomposing the Granger causal relationship in the time domain. Applied Economics, 39 (1). 

Matsusaka, J. & Sbordone, A. (1995). Consumer confidence and economic fluctuations. Economic Inquiry, 33 (2).