Government Spending Through Business Eyes

I know my articles have been vaguely political lately, or at least it is political issues inspiring me to write. I have this odd personal mix of social libertarianism and fiscal conservatism that I find fits poorly into our two party system. So I keep trying to make sense of the issues facing our country and struggle with a decision about who is right to run our country at what feels like a very critical juncture.

Pertaining to the economy, I finally got it, partly from the debate last night and partly from a Fareed Zakaria Newsweek article. If we think of the government as a business, then we need to think in terms of total revenues and cash flow. Total revenues is the same as GDP; cash flow is our budget deficit. As in any business, there are two ways to grow a business: we either cut costs or grow revenues. The idea behind cutting costs is that we can trim fat from the budget and thus make the business more profitable. The idea behind growing revenues is that if we invest in the business we can grow revenues faster than expenses and thus become more profitable.

GDP (Revenue) Growth
1993-2000: grew $2,280B (that’s $2.3 trillion dollars, 29.7% total)
2001-2008: grew $1,930B (18.8% total,estimated 2008 numbers)

Budget Deficit (Cash Flow) Growth
1993-2000: grew -$320B
2001-2008: grew -$2,000B

So why did 2001-8 explode the national debt? Our economy grew slower (we took in less revenues) and we spent more. And why did 1993-2000 work out well for our country’s cash flow? Because our economy grew while we cut expenses. 2001-8’s spending spree would be fine if we were investing in the future, but I don’t think anyone feels that way these days (with the possible exception of the “War on Terror,”  which can be viewed as an investment in our future).

As all of us who run businesses know, there is a time for cutting costs and a time for growing revenues (hopefully you are doing both at the same time but I don’t think that generally happens. The goal should actually be to increase revenues faster than we increase expenses). Senators McCain and Obama are presenting opposite approaches to this fundamental question. Senator McCain has a ‘cut fat to control costs’ perspective: spending freeze, move education and health care off the federal books, investment in US energy production. Senator Obama has an ‘invest to grow revenue’ perspective: invest in education, US energy production and health care (a competitive issue for US businesses and a sap of potential better uses of our revenue dollars), using a scalple instead of a hatchet on costs.

There is no doubt that investment has worked at times. Our economic success in the 1960s to 1990s (I try to forget about the 70s) has been built on the backs of huge government outlays in the 1930s (electricity) and 1950s (roads) coupled with private investment in technology (1980s-1990s). The question for election day: is it time to invest to grow revenues or is it time to cut expenses?