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A Bill of Billions: Does All of This Fuzzy Math Really Add Up?

December 11, 2008 By:
Fred D. Snitzer, JE Feature
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Among the members of the new economic team of President-elect Barack Obama are individuals who were involved in the major financial crises of the last 10 years -- a leading scholar of the Great Depression, a former Fed chairman who defeated the inflation of the late 1970s, and an economics professor widely considered to be one of the most brilliant in his field.

Although not the "change" that many on the left wing of the Democratic Party had hoped for, this team assembled by Obama suggests a presidency that may govern from the center, at least on economic matters. Larry Summers, Paul Volcker, Christina Romer, Tim Geithner -- they all have reputations for being centrist, pragmatic, extremely smart, experienced and by no means ideological. Their selection has been praised by economists on both sides of the aisle.

So what will they do now? In their efforts to figure that out, this dream team of advisers will look to the past for clues -- to experiences like the Great Depression and Japan's crisis during the 1990s. The crisis of today has created the conditions for a rehash of debates about the Depression: What caused it, what made it worse, what made it better, and why did it end?

Unfortunately, almost 80 years later, we still don't have definitive answers to these questions. Those arguing for a massive fiscal stimulus say that the government did not spend enough during the Depression, and reduced the effectiveness of the spending by also raising taxes and passing destructive anti-trade legislation.

Those arguing against a massive stimulus contend that the government intervention made things worse -- not better -- by injecting a non-economic actor into the equation and distorting markets.

Both sides agree about the harmful effects of protectionist trade policy. Whatever the outcome of these academic debates, Obama has already pledged to spend trillions of dollars to stimulate demand.

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Will it work? Who really knows? A trillion dollars being spent by the government on roads and bridges is a trillion dollars not being spent by the private sector starting new businesses or expanding successful ones. However, the problem is that right now everyone in the private sector is too afraid to do anything: Banks won't loan; businesses are shrinking, not expanding; and consumers -- scared to death that their jobs constitute the next shoe to drop -- are cutting back.

So, the success of all this spending depends, in part, on the ability of the government not simply to spend, but to spend wisely. Building better roads and bridges may help companies be more productive. Throwing money at deficient U.S. car companies may just prolong the crisis.

For government-intervention types, it's not self-evident that the private sector is always better -- witness the billions of dollars misallocated during the tech bubble, or the role of Wall Street in getting us into the current financial mess. For those more distrustful of government spending, there is the Post Office, Amtrak, Fannie Mae, Bridges to Nowhere and Henry Waxman's moustache. And they argue that you don't get Google without first burning through Pets.com.

At the very least, we can expect to see huge government spending with little or no tax increases, resulting in an explosion of the deficit.

In response to the eternal question -- "How will this all be paid for?" -- the answer is: "It won't"-- at least, not in the short term.

Spending money on all sorts of things while expanding the military and creating a single-payer health-care system (assuming Obama follows through with such campaign promises) without raising taxes ... well, it doesn't add up. The government will borrow and spend.

This fuzzy math has long-term implications.

We're already facing staggering costs for Medicare and Social Security that, given rising medical fees and America's aging population, no one has figured out how to pay for.

Right now, America can still borrow at cheap rates, given the dollar's role as the world's reserve currency. However, there is no guarantee that this will continue forever.

However, right now, we're in crisis mode, and the long-term be damned!

Fred D. Snitzer is chief operating officer in the investment-management firm of Prudent Management Associates, specializing in high-net-worth and tax-deferred asset management. For information, go to: www.prudent management.com.

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