Borrowing Against Future Production – Confirmed?

I’ve been making this argument for a whole year now. Government attempts to prop up the sick US Economy will likely make the eventual landing harder and more painful than it would be if government simply did nothing. I know that’s probably not a popular opinion, particularly with those who are really hurting as a result of the current economy and with whom I empathize, but you’d probably have to agree with my opinion if you gave it some thought – that the almost $1.5 trillion that we added to the national debt last year to try to solve our economic woes was not a very good investment given the current level of unemployment is a full 2% higher than President Obama stated it would be if the stimulus package was passed.

We borrowed $1.5 trillion from the future production of our children and grandchildren and have little to show for it. A recent Bloomberg article (January 30, 2010) quoted noted economist, Nouriel Roubini on the reported fourth quarter growth in GDP (emphasis mine):

New York University Professor Nouriel Roubini, who anticipated the financial crisis, called the fourth quarter surge in U.S. economic growth “very dismal and poor” because it relied on temporary factors.

Roubini said more than half of the 5.7 percent expansion reported yesterday by the government was related to a replenishing of inventories and that consumption depended on monetary and fiscal stimulus. As these forces ebb, growth will slow to just 1.5 percent in the second half of 2010, he said.

“The headline number will look large and big, but actually when you dissect it, it’s very dismal and poor,” Roubini told Bloomberg Television in an interview at the World Economic Forum’s annual meeting in Davos, Switzerland. “I think we are in trouble.”

Roubini said while the world’s largest economy won’t relapse into recession, unemployment will rise from the current 10 percent, posing social and political challenges.

“It’s going to feel like a recession even if technically we’re not going to be in a recession,” he said.

Roubini notes that once the loan we as a country have taken against future production is spent, the positive effects on the economy will diminish. I agree. However, I wouldn’t rule out economic contraction versus the 1.5% growth projected by Roubini.

The January 30, 2010 issue of “Investment News” contained a column written by Peter Schiff. Schiff agrees with me. Here’s an excerpt from his column:

In this week’s much anticipated State of the Union address, President Obama again demonstrated his poor understanding of the fundamental problems that confront our nation. By following the advice of the same people who helped guide our economy to the precipice of total collapse, Obama now threatens to push it over the edge.

Notwithstanding his well crafted lip service regarding future spending restraint, the essence of his current program is for more government spending and larger deficits. For all his talk about job creation, his policies will further burden those who might otherwise create those jobs with higher taxes and more regulation. While he did call for tax cuts for the middle class and offered what amounts to bailouts for those struggling to repay student loans, such cuts do nothing to promote growth in the near term and will add to the deficits in the long term.

Schiff, in his characteristic straight forward style, is simply saying that the actions of the government will make the economic problems we face that much worse and make the eventual landing that much harder.

Is anyone listening?

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