The Trouble With Debt

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Dear Friend,

Have you ever read something that leaves your head throbbing?  An editorial in one of Maine’s daily newspapers last July left me with that feeling.  It was so fiscally breathtaking that I’ve kept the yellowing paper in my briefcase ever since.  Commenting on how to address America’s sluggish economy and surging national debt, the editorial proclaimed “There is little that the federal government can do to jump start (economic) growth other than borrow and spend.” Those words stun me every time I read them.

There’s a spirited debate brewing in Maine regarding borrowing vs. budgeting to prudently assist our struggling state economy.  During the past 30 years, governors and the legislative majority favored borrowing to fund road and bridge construction/repair and other large infrastructure improvements.  Billions of dollars have been borrowed by selling bonds to investors, and then paid back with tax dollars over ensuing years.  With interest rates at historic lows, some want to double down on that strategy.

However, the LePage Administration and many of the new fiscally conservative legislators believe differently.  They’re uncomfortable with debt and, when possible, prefer to pay for infrastructure improvements by budgeting the expenses and/or setting aside money each year to build enough reserves for future needs.  This more conservative approach avoids taking on more debt while Maine continues to right-size our unaffordable welfare programs.

Let’s take a look at this debt issue in Europe and Washington, and see what lessons can help us here in Maine.

Excessive government borrowing and spending is at the center of the Greek financial crisis.  Over many years, Greek politicians have created costly cradle-to-grave entitlements which have cemented these expected benefits in the minds of its citizens.  The past two generations have known only “free” government-funded education, health care, and retirement. For some jobs, normal retirement age is 55 for men and 50 for women.  After 10 years of service at a private sector company (12 years with different companies), Greek workers are entitled to government-mandated 25 paid vacation days per year.  Add another 12 public holidays per year.  That’s about one and a half months per year of not working but getting paid. Powerful unions make it extremely difficult to terminate employment even for good reason.  Public services and businesses regularly close by early afternoon.

The socialized Greek structure succeeds only with ample tax dollars to pay for the unusually generous and expensive entitlements.  This requires a robust private sector economy that creates plenty of jobs and generates the needed tax revenues.  Instead, Greece supports a huge public sector where one of three citizens works for the government.  Those employees receive higher wages and more generous benefits than the shrinking number of private sector workers who struggle to pay for them.  Greeks are levied personal income tax rates up to 45% to help keep the system afloat, inadvertently driving more companies, jobs, and tax revenues out of the country.

The Greek financial death spiral has come to a head during the past few years for the whole world to witness, sadly.  With the 17-nation European Union (EU) closely linked, Greece’s sinking economy could pull much of Europe down with it. Beginning a fifth year of recession, Greeks suffer under 22% unemployment as quality of life and living standards plummet.  Young workers are increasingly discouraged as businesses close, jobs evaporate, and investment capital flees the country.  Worker strikes and civil unrest are spreading.

The Greek government has been defaulting for over a year.  Still, Greeks fight painful wage cuts and cling to entitlements to which they’ve been accustomed. While having spent and borrowed itself silly, Greece now asks the world to bail it out.  Greek public debt totals 160% of gross domestic product (GDP).  That means it would take the value of every product manufactured and every service provided in Greece for 1.6 years to pay back the money it has borrowed from lenders around the world.

Why does this matter?  With today’s connected global economy, excessive government spending and borrowing on a massive scale, even by Greece with its 32nd largest world economy, can impact nearly everyone, including us Americans.  Spain, Portugal, Italy, and Ireland share many of the same spending and debt problems as Greece.  Their unhealthy economic and financial symptoms may not be far behind.

European banks could lose half of the money they loaned to Greece.  That would leave them less money to extend to other customers, like American companies wanting to grow and create more jobs here at home.  Shrinking credit available to European businesses and consumers might have already pushed Europe into another recession.  Roughly 47% of the goods and services sold by many of our largest domestic (S & P 500) companies are to non-U.S customers, including those from Europe.  A shrinking appetite abroad for our products and services means fewer jobs here in America.  The International Monetary Fund (IMF) lends money to troubled countries. U.S. taxpayers provide 18% of those IMF funds.  The IMF has already loaned billions of dollars to Greece.  That puts more upward pressure on taxes here, hurting American families and businesses.

This reckless pattern of excessive spending, borrowing, and debt has found its way to Washington.  Career politicians, primarily looking to get re-elected, are addicted to spending someone else’s money – yours.  Our once frugal nation is flat broke, can’t pay its bills, and heavily in debt.

This is the fourth year in a row that our federal government has spent approximately $1.5 trillion more than it has collected from us in taxes. It makes up the difference by either borrowing the money, or printing it.  Now, our nation owes $16 trillion to investors around the world who have loaned us the money.  Washington has no credible plan to balance government spending with tax revenues collected.  It has no credible plan to start paying off our frightening mountain of debt. It has no plan to reform and save our three behemoth safety nets, Medicare – Medicaid – Social Security, two of which are running out of money.  There aren’t enough Washington statesmen to step forward and tell the truth to the American people about the financial crisis which they created.

Why does this matter?  This unstable fiscal platform discourages entrepreneurs from risking their savings to start or grow their companies, and to hire more workers.  They fear rising taxes will be needed to pay for out-of-control government spending and piles of debt. They see continued high energy costs because of Washington’s refusal to permit the full development of our energy resources here at home.  Job creators see rising health care and insurance costs because of Washington’s inability to successfully address this haunting problem that hurts every American family and business.  Like the Greeks, we see our prosperity and economic freedom slipping away, albeit not as quickly.

Here in Maine, we’re doing things differently.  The leadership team in Augusta has rejected the big government borrow-and-spend strategy embraced by Washington and many European countries, and espoused by the newspaper editorial a year ago.  Instead, we recognize that free enterprise has lifted more people out of poverty around the world than any other economic system.  For free market capitalism to work, it must have a government that supports it.

Maine state government is building a business-friendly climate to attract private sector investment and jobs.  We’re reducing the cost and complexity of starting and growing a company in Maine.  We’re eliminating public debt, cutting government spending, lowering taxes, and making it easier to run a business here.  We’re supporting the expansion of natural gas to lower energy costs.  Health insurance reforms are already reducing premium costs in the individual policy market.  We’re rightsizing our unaffordable Medicaid (Mainecare) program to preserve this important safety net for the most vulnerable.

This is a rare opportunity for Maine to show our country and the world that we can and will get it right.  To re-engineer a smaller and less intrusive government that costs taxpayers less, and refocuses limited resources toward those truly in need.  A state government that helps a new generation of Mainers proudly become more independent and responsible.  It will take courage. We will be criticized.  But, in the end, our kids will be better able to live and work here in Maine. Better able to raise their families, and to live more prosperous and secure lives with more choices.  In the end, it will have been well worth the effort and patience.

 

Best wishes,

Bruce Poliquin
Maine State Treasurer

 

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