Authors: Gary Shapiro
Earlier, we examined why innovation is the key to real growth in our economy and jobs. But innovation in the U.S. is being strangled by national policies that threaten to condemn future generations to stagnation and decline, and it all starts with massive government spending.
U.S. government spending is entirely divorced from any economic reality. In 2009, our federal government spent $3.5 trillion. This compares to $2.5 trillion spent in 2005, a 40 percent increase in only four years. Moreover, in 2009 the feds collected $2.1 trillion in taxes and fees, resulting in an annual deficit of $1.4 trillion. And according to the
most
optimistic Obama Administration forecast of future deficits, the total debt will grow to a minimum of $11 trillion in 2019. This level of debt would be 82 percent of our GDP, double the level of 41 percent in 2008.
But our national situation is much, much worse than that. Add in $2.5 trillion in state and local debt, $3 trillion in unfunded state pension liabilities,
$106 trillion
in unfunded Social Security and Medicare liabilities, and $1 trillion in unfunded state health care and other benefits, and a more realistic projection of future federal deficits (in light of such initiatives as Obamacare and total U.S. debt obligations) amount to “$130 trillion or so, or just under ten times the official national debt” according to one estimate.
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Much has been written about the financial problems of Social Security and Medicare, so I won’t rehash those matters. However, it’s only recently that the financial time-bomb of public unions has been recognized, so a few words about that are appropriate. I’ll begin by betting that you don’t know that the U.S. Bureau of Labor Statistics reports that, in 2009, the number of government union workers (7.9 million) for the first time in our history exceeded the number of private sector union workers (7.4 million). And given the further expansion of government and the contraction of the private sector since 2009, this differential has undoubtedly grown.
As noted above, the public union problem is primarily one of unfunded pension and health-care liabilities. The federal government and nearly every state and local government have committed to defined benefit plans for their full-time employees. These programs are massive: the federal retirement program supports more than 2.5 million annuitants. The fifty states and thousands of local governments support more than 8 million annuitants. The payouts are generous because most payouts are based on years of service and total compensation in the worker’s final year. For example, the annual payout to retirees generally is 2–3 percent per year of service multiplied by final compensation. Thus, a fifty-two-year-old worker making $100,000 in his final year before retiring could get $90,000 per year for life, not counting lifetime medical benefits.
Predictably, our federal government is already shifting funds to state and local governments to help pay for their plans. About one-third of 2009’s nearly $800 billion “stimulus” package and the entire summer 2010 sweetener stimulus went to states, primarily to enable state government to both avoid layoffs and pay pension obligations. No one knows what will happen when the stimulus plan funds to states run out in 2011.
The massive federal debt destroys future private sector investment because the only ways to pay off this staggering level of debt are to (a) increase taxes and (b) print more money, which will drastically
lower the future value of the dollar. Both actions lower the returns that private sector investors can earn. Moreover, the riskier an investment, the greater the return that investors need to compensate for the risk, and innovation investments are invariably among the most risky, so they will be disproportionately ravaged, crushing economic growth and job creation.
But the devastating results for innovation from such massive government spending go beyond higher taxes and a debased dollar. First, out-of-control debt directly increases overall economic uncertainty among private sector investors, significantly complicating their investment decision-making and further reducing investment. Second, as we are seeing in the present economic crisis, our government typically responds to economic turmoil by significantly increasing and expanding regulation of business, which increases costs, lowers investment returns, and further increases uncertainty.
In fact, a September 2010 report issued by the SBA Office of Advocacy found that rules and restrictions imposed by the federal government now cost Americans some $1.75 trillion annually, up 60 percent in less than five years. The report also says that the cost per employee of these regulations is higher for small firms than for large firms. And a recent conference on the 2002 Sarbanes-Oxley Act held by the American Enterprise Institute found that:
. . . the process of nurturing innovative and high-tech start-up companies has been slowed [because] the high cost of becoming and remaining a public company has made an initial public offering (IPO) financially impractical for many small companies, which
in turn has narrowed the options of the venture capital firms that have usually provided seed money financing for risky high-tech start-ups.
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Uncertainty causes all private investment to wither, and innovation investments wither the most. For example, venture capital (VC) firms, which have financed such successful start-ups as Intel, Microsoft, Google, and eBay, typically have an investment horizon of five to seven years. Unless VCs have reasonable certainty about tax and regulatory policies over this horizon, their risks will skyrocket, and their innovation investments will shrink.
As a final note about our desperate financial situation, consider that as annual deficits build up our mountain of debt, the annual interest on that debt will account for an ever greater share of annual spending, leaving less for good and essential programs. Interest payments are expected soon to reach more than $500 billion, exceeding the entire annual defense budget, leading U.S. military commanders to warn Congress that this is a grave threat to our nation. The 2009 “stimulus” alone added $280 a month to the debt of every American citizen. Put another way, the 2009 $1.4 trillion deficit means that future generations will have to pay $58 billion annually just to serve the single year 2009 deficit (assuming a 5 percent interest rate and no principal payments). The 2009 total U.S. accumulated debt of $7 trillion requires $350 billion in annual interest payments using this formula.
To put the interest issue in non-technical terms, consider this recent observation by columnist George Will:
In 1916, in Woodrow Wilson’s first term, the richest man in America, John D. Rockefeller, could have written a personal check and retired the national debt. Today, the richest man in America, Bill Gates, could write a personal check for all his worth and not pay two months interest on the national debt. By 2015, debt service will consume about one-quarter of individual income taxes. Ten years from now the three main entitlements—Medicare, Medicaid, and Social Security—plus interest will consume 93 percent of all federal revenues. Twenty years from now debt service will be the largest item in the federal budget.
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What can be done? Our federal government never reduces spending, seldom cuts obsolete or ineffective programs, increases the complexity of taxes (the Internal Revenue Code is at more than 3.4 million words and counting), and incessantly augments the scope of business regulation. And then our politicians appear dumbfounded that our economy is struggling and jobs are scarce.
I believe our situation is so dire that we cannot talk about merely slowing the rate of government spending. Instead, our goal must be to cut the spending, and cut it past the point where it symbolically “hurts.” I liken this to the medical strategy in war and other major crises where the resources are limited compared to all possible needs: triage. This is where the injured are divided into three groups: those who can survive without immediate medical attention, those who need immediate medical attention to survive, and those who are almost certain to die and will receive no attention other than painkillers.
Similarly, our government needs to triage its spending to those programs most important to our future, especially the future of our children. In doing so, we will stop spending for programs and people that either do not need or do not deserve taxpayer funding, focusing instead on those programs and people that need and deserve taxpayer funding.
If you doubt my sincerity about this approach, consider my opinions and behavior when confronted with government spending that would have benefitted the industry I am paid to represent. As indicated earlier, the Consumer Electronics Association has never asked the government to spend money to benefit our industry. This was awkward for me when I was testifying before Congress.
Democrat and Republican members pressed me to specify how they could get money to consumers to subsidize the transition from analog television to digital television. They were concerned that consumers, especially poor and elderly consumers who did not own digital TVs or get cable or satellite service, would lose television service when the analog service was cut off. I consistently responded with data challenging the extent of the problem. (Both the Congressional Research Service and the National Association of Broadcasters had data that indicated the “at risk” population was almost double the size we had estimated—but we at CEA were quickly proved to be correct). I told Congress then that we did not advocate that the government spend money on this program. Nevertheless, despite our lack of support, Congress allocated $1.2 billion to provide each American family two $40 coupons toward the purchase of an analog-to-digital converter box for use on analog televisions. This subsidy would go to members of the CEA who made these boxes— but I am proud the CEA was never on record as supporting it.
To some extent, the coupon program was the political price Americans had to pay for a transition that would bring in an estimated $20 billion in revenue for the U.S. Treasury (from auctioning off spectrum freed by the analog signal cut off). In any event, I then threw myself and CEA into working to make the transition
succeed. I sought my counterparts from the cable and broadcasting industries, and the three of us quickly agreed to work together to inform the American public about the February 17, 2009 transition. We solicited some two hundred groups to support our efforts and, within months, had gone from near zero awareness of the transition to nearly 100 percent awareness among Americans of the February 17 transition date.
Along the way, in 2007, I was summoned to the office of the Federal Trade Commissioner (now Chairman), Jon Lebowitz. Commissioner Lebowitz expressed concern about public confusion about the transition and asked whether I thought the FTC should get involved to regulate how the message on the transition was conveyed. I said that he should keep this in perspective: a few people might lose television service for a few days. I suggested he compare this to the fact that millions of people were signing mortgage documents when they bought their homes which they simply did not understand, and this would likely result in them losing their homes. Hearing that, he agreed.
But true to form, the government managed to turn a straightforward program into another boondoggle paid for by our taxpayers. Only days away from the February 17 analog shut-off, the demand for coupons was strong, as we had projected. But the government bean counters had assumed that every request for a $40 coupon counted as a government expenditure. At the peak of program demand, they said they had run out of money, and they stopped sending coupons.
A simple fix would have been for Congress to allow them to use historical redemption rates and even provide a modest amount of back-up funding authority in case demand and redemptions exceeded projections. Indeed, this was the bipartisan approach being discussed. But some Obama advisers had convinced the presidentelect that the transition date had to be delayed and that more funding had to be provided. So before he even was sworn in, Obama
asked Congress for another $250 million in funding and to delay the transition date until June 12, 2009. We at the CEA opposed the delay and the entire financial request, even though it meant more money to our industry.
In the end, Congress decided to spend an additional billion dollars, which was a total waste of money. Just about everyone in Congress knew it was a waste, but being frugal in spending taxpayer funds was less important to the Democrats in the majority than not crossing the new President. If we had stuck with the February 17 date, at worse a few Americans would have lost television service for a few days. Despite representing television and converter box makers, I keep asking how losing television service for a few days compares to how that money could have been used for important things like cutting the deficit or educating our children.
Fortunately, we have some politicians who are also demonstrating common sense and backbone in response to our crises. Case in point is Minnesota governor Tim Pawlenty, a Republican who inherited a financially troubled state but turned the state’s finances around simply through priority setting and discipline. In a column for Politico, he wrote:
Not everything the government does is equally important. When faced with a budget shortfall in Minnesota, we considered the importance of programs. We decided to protect funding for the most important ones: the National Guard, veterans’ support programs, public safety and K–12 schools. Nearly everything else has been cut. [In 2009] we cut overall spending for the first time in the state’s 150 year history.
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This is triage of government spending in action, as well as courageous political leadership in action. Along with Governor Chris Christie of New Jersey and a few other politicians, Governor Pawlenty is demonstrating what must be done and can be done to reverse our economic fortunes.