We are facing a serious financial crisis in the United States. Frankly, most governments are facing serious financial difficulties and frankly possible collapse.
We are in a severe recession. Government debt is through the roof. Money is being printed out of thin air at such a rapid rate that inflation is unavoidable. Of course this money isn’t being put under Obama’s mattress. It’s being spent. Keynesians argue that we need to spend more money in a down economy. “You need to invest to stimulate the economy.” That reminds me of one of my father’s favorite sayings, “You can’t spend your way to prosperity.” That is true for young couples as well as for governments. Would anyone suggest to a young couple that they get as many credit cards as possible and then load them up with debt? There are famous examples of people who have made such attempts. Some experience temporary success but it almost certainly ends in failure.
I believe now is a time for tightening our belts. There is a chance that it could prolong the recession but a recession is not a bad thing. It’s a correction. It’s a time to catch up. It’s a time to clear out bad investments. A recession is a time to correct investments that were not sound.
I think of a recession this way. If you have ever been hiking in the mountains you know that maintaining your footing can be difficult. As much as you may want to enjoy the scenery, you need to keep your head down and watch where you step. If you don’t, you will trip and fall. Though keeping your head down helps you avoid sprained ankles and falls, it also promotes getting lost. You periodically need to stop and look around. Get your bearings. Make sure you are on the right trail. Get a drink of water and look at your compass.
The economy is the same way. There are bad investments and they must be realized. Ask yourself, what if Sony had not stopped making the betamax? In my twenty years in the software industry I’ve seen literally hundreds of products killed. It’s this level of responsiveness that keeps businesses alive. Government has a very difficult time killing programs. Government suffers from a lack of accountability. And as a result, they are not incented to be efficient, agile or flexible.
When a recession is trying to work, government spending masks the problem. Other government actions such as housing stimulus, or band aids such as cash for clunkers, greatly slow down or even postpone the needed correction. Does anyone outside of Detroit argue that the auto industry needs to make fundamental changes in the way they do business? Recklessly pouring billions of dollars into the industry doesn’t encourage such changes. Does anyone love to fly commercial? Did the government assuming tens of billions of dollars in airline pension debt encourage airlines to make the changes that are necessary for the long term good of the industry? Don’t get me started on Amtrak.
Based on these realities, we need to cut out all our wants and focus solely on our needs. That is what the families of the world have been doing the last few years. Families are mini economies. They invest, produce, sell and spend. What is good for the goose is good for the gander. Governments need to take a hint from the families of the world. They need to tighten their belts.