Our Economy is Broken!

Is the U.S. economy broken?

This is the final blog post in a series of five that I am writing on how the U.S. government that we once cherished is now broken. Previous blog posts include:

Think about your financial situation for a moment.  Do you hope to earn more money to help pay down some personal debt?  Do you wonder how our government bailed out GM, and some of our nation’s largest banks?  Do you question how your local government is prioritizing spending on pot holes in the street outside your house?  Are you concerned about being able to afford healthcare?  Are you stressed about getting laid off at work?

We all say that money is not that important.  And yet we seem to worry about financial matters all the time.  What if I told you that your government has an effect on all of the issues I described above, and they are making your problems much worse by the actions they are taking in Washington DC?

Our Economic Woes

What if I told you that our cost of healthcare is three times as much as the average of all developed countries?  What if I told you that we spend more for our military than the next eight countries combined?  What if I told you that the Federal Reserve is protecting wealthy bankers, but not looking out for our long-term economy?  What if I told you that we are taxed higher than pseudo-socialistic societies, but have few government services to show for our cost of government?  What if I told you that our war on poverty had trapped more in poverty and has destroyed families in lower-income classes?

Healthcare

Prior to passage of the Affordable Care Act (ACA), we had an economic problem with the affordability of health insurance and general health care costs.  After passage of the ACA, our problems have not quite disappeared.

U.S. health care costs compared to other OECD countries 2011

The good news is that our U.S. healthcare seems to have flattened out.  The bad news is that no one can afford to get healthcare because of high deductibles on their accounts.  Unless you are one of the fortunate few who have free or reduced cost healthcare through expanded Medicaid programs.

Military

I am an engineer and a businessman.  I look through the world with a relatively logical and unemotional lens.  In the case of our military, we are paying quite a sum of money.  For that price, we ought to expect to gain protection from enemies that want to harm us; and world peace.   The more we pay, the more world peace we ought to have, right?  Unfortunately, that doesn’t seem to be the case.

Our country had experienced four brutal wars up until 1945: 1) Revolutionary War; 2) Civil War; 3) World War I; and 4) World War II.  Most people can see the purpose of involving ourselves in these wars.  Since World War II, there have been a lot of military skirmishes that most find somewhat ambiguous: 1) Korean War; 2) Vietnam War; 3) Gulf War; 4) Afghanistan; 5) Iraq; and 6) Syria.  I have left out a lot of small conflicts, but I only have so much room on my blog post :)  The question you have to ask yourself, “Are we safer as a result of these conflicts?”  Another question, “What makes these conflicts any more honorable and valid than other conflicts in the world where we did not engage (Rwanda)?”

The answer is that we have not really made much progress in making the world a safer place.  In fact, we may have created enemies through unwanted collateral damage in the process.  Now, we have political candidates beating the war drums again to dig the hole yet deeper.

U.S. Military compared with the next largest military forces in the world

I do believe that we can gain peace through force to some extent.  However, I believe the U.S. has evolved into the sole super-power and the world’s police force.  By creating such a large fighting force, everyone expects us to continue to pay for and fight their battles.  While this may seem a noble cause, it is economic suicide at least; and enabling a military dependence at worse.  And… once we commit this economic suicide, we really won’t have much worth protecting.

Federal Reserve – Bank Bailouts

I first want to say that I am not an opponent of fiat currency, the Federal Reserve, or ‘reasonable amounts’ of government debt.  With that said, I think it is important to outline why the actions by the Federal Reserve and our government will damage our economy long into the future.

In brief, the 2008 bail-out situation amounted to seven key tactics: 1) stimulate the economy with sudden government spending; 2) a token tax reduction in social security taxes; 3) government purchase of bad loans; 4) take over of GM; 5) purchase U.S. bonds; 6) low interest rates; and 7) extended unemployment benefits.  Let’s now think about who got bailed out.

Sudden increase in government spending:  Most money went to fund states and local governments to keep them from downsizing as much as the private sector had in the downturn.  Tax-payers simply added another trillion dollars to their already staggering debt that will now cost interest long into our future.  A few government contractors and government employees benefited while we blew money in a hurry on supposed ‘shovel ready’ projects.  A few, now bankrupt, solar company owners also got a nice personal cash injection for their retirement nest-egg.

Token social security tax reduction:  This move gave a few working people a few extra dollars to spend.  However, if you happened to be one of the 30,000,000 unemployed in this era, you probably didn’t feel that fortunate.  Since our Social Security program is already destined to go insolvent in fifteen years, this move probably did not help matters much.

Bad Loan Takeover:  After making bad loans, our banks got a reprieve by selling those loans to you and I.  So, the banks could not afford to keep these bad loans, but all of us could afford to take them on?  As expected, home owners defaulted on their loans and were evicted from their, now foreclosed, homes.  The goods news is that the banks were able to resell these homes at a profit and repay us tax-payers for our initial generosity.  The banks even got some great new business out of the new home owners.  The banks made money, got rid of toxic debt, and the poor home owners got kicked to the street.

GM Take Over:  There is no question, GM was headed for failure as it had created a grossly inefficient behemoth that couldn’t afford bloated pension programs, high-wage workers and excessive overhead costs.  We actually have remedies for such companies.  They either file for bankruptcy protection and deal with their financial problems without creditors taking their stuff; or they sell off their company to the highest bidder.  Instead of either of these actions, our government forced a restructure; took the company from its share-holders and gave major concessions to the United Auto Workers union (UAW).  It kept many of the excessive cost structures that brought GM to bankruptcy initially in order to keep political union contributors happy.

U.S. Bond Purchase:  If it wasn’t enough that our Federal Reserve manufactured money out of nothing to by toxic mortgage assets, it decided to purchase U.S. treasury bonds.  After all, no one else wanted U.S. debt, so why not create money out of nothing and buy some ourselves?  So, now our Federal Reserve owns U.S. debt which it purchased out of fabricated money.  What did that do for the rest of us?  It kept interest rates low so that our savings accounts would become worthless; and our congress could be emboldened to borrow even more at such low rates.

Low Interest Rates:  Our Federal Reserve has one legitimate trick in its book to help our economy in lowering interest rates.  It used this trick in the 2008 bailout.  So who benefited from this 0% interest rate?  The banks got free money and could loan it out at 5%.  You and I did not get 0% interest money.  This was one gigantic gift to gigantic banks to give push their profits ever higher for some quite attractive bonus checks.

Extended Unemployment Benefits:  Our government extended the timeline on unemployment benefits to show that our government actually cared about the unemployed.  Ironically, most of these unemployed workers had no intention of returning to the workforce.  They took their nice severance paycheck from the federal government and simply retired leaving one more deduction on the rest of working class American’s paychecks.

In all of this bailout mess, banks did quite well; unions friendly to politicians also did quite well, but the rest of us got taken to the cleaners.  We have extreme government debt, lack-luster employment and a volatile stock market.

What about Sweden?

Some of you may claim that we need even more government involvement than we have currently.  After all, look at how well Sweden is doing.  Sweden offers free higher education and health care to its citizens. How can Sweden do all of this?  Why don’t we have these same government benefits in the U.S.? I’ll tell you why, because Sweden is much more efficient at spending its tax revenues than the U.S.  You say, “But Swedish taxes are much higher than the U.S.”  That’s true to some extent.  However, the Swedish government only spends 26.3% of its GDP; while the U.S. is currently spending 35% of its GDP.  How can Sweden offer so many more government services than the U.S. while we spend so much more?

You say, “But the rich pay their fair share in Sweden, not like the U.S.”  The highest income tax rate in Sweden is paid at 1.2X the average income; while the highest income tax rate in the U.S. is paid at 8.5X the average income.  Sweden’s taxes are much less progressive on wealthy individuals.  In addition, Value Added Taxes (VAT) make up a large portion of Sweden’s tax base and those taxes are charged on anything that is consumed by all wealth classes of people.  This means that all Swedish people have a vested interest in how efficiently their government spends their money.  In the U.S., many seem fine with wasteful spending as long as it’s not their money.

Welfare Destroying American Families

Many of our young people have decided it is much easier to have a bunch of kids and be taken care of by the government instead of taking the traditional route of establishing themselves financially, getting married and having a family.  After all, why wait, if you can have kids and an okay income at the same time?

Unwed Mothers Statistics

Sadly, the traditional family unit has been less likely since we started our war on poverty after World War II.  Maybe we need to re-think how we think we are helping those who are less fortunate.  … and not make them even less fortunate.

Conclusion

I have only touched the tip of this economic disaster iceberg.  Many of you may read this and think, “What an over-reaction.  I’m fine.  I am working in a great job and have no problem with how the economy is going.”  I’m happy for you, if this is the case.  However, this is not the situation for most.  We have run out of rope with the inefficiency with which we run our government.  More people are deciding not to work at all as the government can provide their basic needs; and bankers and other large companies continue to raid public coffers.  It is time we got our financial house in order.

What can we do?

I plan to publish a book entitled “Unfree Market” in March 2016.  In the book, I will detail these economic problems in much greater detail and also spell out some workable financial solutions to all of these dilemmas.  If you are interested, please leave me your email on the contact page.

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