Editor’s note: A recent reader to my blog asked: “I’m interested in your perspective on the recent government stalemate regarding spending. Is this a total disregard for serving the public or rather two sides that are firmly looking to serve their constituents? Your book addresses how to reconcile the seemingly conflicting objectives of pursuing revenue while achieving customer satisfaction. How would you apply the same thinking to this problem?” My response follows:
In today’s economy it is not so much a debate about spending but about debt spending. The debt of the United States is currently in excess of $28 trillion or about 127% greater than the nation’s annual economic output or GDP. This makes the debt-to-GDP ratio the highest since the end of WWII. And, with Democrats at the helm in Washington hell-bent on buying votes the level of spending is expected to grow by many more trillions of dollars before they get voted out of power. Before the blitzkrieg in spending is over, however, we’re going to find our nation in the same neighborhood of sick economies as Italy and Greece. Thirty years ago, in contrast, the ratio of debt to GDP hovered around 50%.
Roughly seventy-eight percent of the current debt total or about $22 trillion represents IOU’s – Treasury bills, bonds or notes – held by you and me as taxpayers, corporations, and foreign governments. The rest of the debt or about $6 trillion is money owed by the government to various departments and agencies. The Social Security Trust Fund, most notably, accounts for about 50% of all intra-governmental obligations. Given this backdrop, we have a perfect right to be antsy about when or whether we’ll get paid back. Social Security, particularly, should be of grave concern as it is precariously balanced at a break even between tax revenues taken in and benefits paid out.
The current debt level is financially troubling for the nation. Each U.S. taxpayer now carries nearly $200,000 of national debt on his back. This is roughly three times the debt-load citizens carried when President Obama came to power. That administration was all about spending, driving total debt from around $10 trillion – or about 67% of GDP – to in excess of $20 trillion, while stifling GDP growth by enacting endless regulatory roadblocks, and raising taxes. It is no wonder that the nation’s average annual growth rate of 2% was the slowest in almost a generation. You don’t have to be an economist to conclude that our nation’s lot has not improved over the last twelve years or so and it can be argued, quite convincingly, that it is nearly three times as worse off.
IF YOU CAN MEASURE IT THERE IS A CHANCE YOU CAN MANAGE IT
Granted, not every phenomenon is measurable – pride, purpose, patriotism, etc. But a financial metric indicative of a nation’s economic health is clearly measurable, trackable, and given sufficient political will manageable. George Shultz, former Secretary of State and Secretary of the Treasury, and economist John Taylor remind us in their book Choose Economic Freedom that the nation was devoid of the economic indicators that would have forecast, if not prevented, the inflationary and interest rate crises of the 60’s and 70’s never mind the fiasco that was the Great Recession of 2007-2009. We are apt to repeat those mistakes, however, if our political leaders fail to act. Incidentally, the Federal Reserve seems nonplussed by any of this while continuing to accommodate deficit spending. Just recently, Jerome Powell, Chairman of the FED indicated that “there is no question of our ability to service our debt for the foreseeable future.” This is the same FED that under Alan Greenspan refused to regulate over-the-counter derivatives which played a huge role in the aforementioned Great Recession.
Leaders in various countries have become more responsive to their citizens by coalescing around a national metric of financial prudence. Countries such as Switzerland, and Germany, have instituted “debt brakes” to keep spending within specified limits subject only to emergency conditions. Poland has gone a step further by constitutionally mandating a debt-to-GDP ratio of 60%. In the United States, nearly all states have balanced budget requirements while some even have specific spending caps. The stringency with which those requirements and caps are applied, however, varies widely from state to state.
Our political system has no such financial unifying principle or metric at the federal level other than the vague aspiration of serving the public and providing for the “common good” to guide the actions of elected officials. The upshot of such ambiguity is that even if in our wildest dreams we could imagine a Congress populated largely by selfless public servants the lack of a concrete metric to gauge the so-called common good would still lead to endless divisions and debates. Clearly, if a metric lacks clarity prescribing a course of action – never mind judging the merit of an action – is hardly an objective exercise.
The United States Congress, despite jawboning the matter for decades, has failed to set an objective standard of performance for which we as citizens can hold its members accountable – at least insofar as the nation’s debt management is concerned. It is little wonder that the debt ceiling is raised almost on cue every year. From 1980 to 2017, for instance, the debt ceiling was raised a total of 46 times. That’s 46 times in thirty-seven years. And, some years especially in the decades of the 1980’s and the 1990’s the debt ceiling was raised multiple times in a given year. The debt ceiling was most recently raised in 2019 by more than $2 trillion.
It is true, that a coterie of GOP senators – John Kennedy of Louisiana, and Rand Paul of Kentucky among them – has long argued for instituting spending cuts to offset debt limit increases but their enthusiasm for such an initiative has never been shared by the big spenders on either side of the aisle. And, so the hobos dance around the barrel fire while taxpayers endure an eroding standard of living.
CAN GOVERNMENT LEARN ANYTHING FROM BUSINESS?
In business there are metrics aplenty. The vast majority of these metrics are indeed financial in nature. Fortunately, while of recent vintage, the debate has begun to turn so as to temper the uber-emphasis on revenue performance – or more correctly, earnings performance – versus customer satisfaction. And, although there are plenty of ways to directly gauge a customer’s satisfaction the assumption now is that there is no better proxy for the long-term potential of a business in the service and information age than the strength of its customer satisfaction ratings. Yes, there is much lip service that still surrounds the need to to serve customers with avidity. But executive leaders are now nearly unified in their belief – if not in their actions – that a satisfied customer is a most desirable long-term corporate objective.
The corporate battles that now rage are more tactical and center mostly around the planning horizon over which the benefit of achieving high customer satisfaction ratings should be measured. Most executive leaders, unfortunately, are still of a mind that undertaking initiatives on behalf of the customer are fine if the benefit of such initiatives can be seen on the bottom line in the short term. This behavior, of course, is born of ingrained compensation schemes that reward executives for financial performance, this month, this quarter, this year. And, until such time as this myopic view of corporate performance is altered executives will flail in pursuit of sustainable competitive strategies while ironically lining their own pockets at the expense of shareholders.
THE DEBT CEILING DEBATE: A FINGER IN THE EYE OF THE U.S. TAXPAYER
In many ways, the hair-trigger reaction by Congress to raise the debt ceiling as spending nudges ever upward has much to do with voting constituencies that are not willing to give up any benefits that come their way. As John Cogan says in his book The High Cost of Good Intentions, “Because entitlement programs distribute cash assistance directly to large numbers of voters and reimbursements directly to sizable numbers of service providers, they are an efficient vehicle for gaining electoral advantage.”
Keep in mind that roughly 62% of all federal spending goes for mandatory programs such as Social Security and Medicare so there is little Congress can do in these areas without undertaking major and radical changes that would prove politically explosive. Approximately 8% goes to service the federal debt – a ratio which is apt to explode when interest rates, currently at .25%, return to historical averages. This leaves a not inconsiderable 30% of available budget dollars for discretionary items such as national defense, foreign aid, transportation, and education. It is the magnitude of the discretionary budget that gives rise to the spending jamboree which citizens witness each year as Congress kows to one political expediency or another. If that weren’t the case members of Congress would soon develop a stiff backbone and they would get serious about adopting a more prudent fiscal policy.
The behavior of politicians in the debt ceiling debate has been nothing more than political theater and posturing. In the process, nothing much gets done. And, until unifying principles emerge that can rally a bi-partisan Congress to satisfy the will of the people in this regard the stalemate over the debt ceiling will continue to constitute a finger in the eye of the U.S. taxpayer. If there is a positive to the endless debates about the debt ceiling, however, is that it shines a light on the seriousness of our nation’s financial mismanagement by those in Washington. Clearly, the nation’s debt is growing faster than the economy. That path is unsustainable and will inevitably lead to making painfully difficult spending choices – guns or butter – that will only make the current debate look like kids’ play.
Management Advisor
