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Chadwick: The Problem is the Government, Not the Deficit

There has been lots of haranguing and hand wringing about the level of U.S. debt, fiscal irresponsibility, the rampant printing of money and the ultimate inflationary impact from the profligacy of the current fiscal and monetary policies in this country.

But I think that view is missing some important points.

Yes, the U.S. debt level is high and if spending continues unchecked, it will become a problem.

But deficits and rising debt in the midst of a recession are inevitable.

We have been there before – in fact many times since World War II. But we have reversed course when the economy improved and we can do the same this time as well.

Unemployment
Unemployment

Cutting off unemployment benefits will do absolutely no good and lots of harm. People who have been just holding on financially will fall off, and there is no economic benefit from that.

Raising taxes will only serve to impede economic growth.

There must be concrete signs of real economic recovery before trying to solve the deficit. When the recovery has truly taken hold, then tax receipts will rise and tax rates can also be raised.

But the real problem that faces the public sector – Federal, State and local – is its lack of accountability, its lack of competitiveness and its bloated cost structure. That is where the knife needs to be used.

The private sector is lean. In fact, the corporate balance sheets of U.S. companies are in the best shape they have been for decades. Corporations are flush with cash; they don’t need to borrow and they can and are investing. Productivity continues apace, proving a point Jack Welch used to make over and over, “Productivity is infinite.”

Even the consumer is getting into better shape. Savings rates are up; spending is more in line with earnings and balance sheets are improving.

But the public sector – which is aggregating more power and scope, as the U.S. Government gets its tentacles into health care, banking, housing and energy - is a mess, to put it bluntly. Public sector wages and benefits exceed those in the private sector on a per capita basis!!! Featherbedding is the name of the game in the public sector and that, together with benefits that seem mindboggling to employees in industry, is what is wreaking havoc with deficits at every level from the White House to Main Street.

Once upon a time, public sector jobs paid less than private sector jobs – compensation for relative job security and guaranteed retirement benefits. Today, those same jobs command a premium in pay, but have foregone none of the benefits. The collective bargaining system in the public sector is broken. Elected officials at all levels of Government are beholden to the votes of union members, so there is little incentive for them to negotiate the kinds of cuts that are necessary to reduce costs and deficits.

It’s time for private industry to assume the management of entire chunks of the public sector. How about starting with the U.S. postal system at the Federal level and the Department of Motor Vehicles at the state level?

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Patricia W. Chadwick has had more than 35 years of investment experience. She is the founder and president of Ravengate Partners LLC, a consulting firm that provides advice on financial markets and global economics.