A Hard Decade or a Bad Century

| November 3, 2011 | 0 Comments

This is how Thomas L. Friedman, New York Times Columnist and Pulitzer Prize winning author of “The World is Flat: A Brief History of the 21st Century,” has framed our coming choices. Over the past three decades, we have, as a nation, been spending more than we’ve been earning. This has happened at every level of society, including our Federal, state and local governments.

Broadly speaking, wages have not kept pace with inflation and consumers have been borrowing money in order to keep up and feel wealthier. Furthermore, as our national debt has increased, climbing steadily to levels not seen since World War II, economic growth has stagnated as savings has been replaced by borrowed money. At the same time, technological and political advancements have created a world in which it is much easier for the other 6.5 billion people on the planet to compete with our own domestic workforce.

Today, our national debate has focused on how much we must cut spending in order to balance the budget. Given our fiscal imbalances, this is a compelling concern, but unfortunately it misses the bigger picture. For decades, our government has repeatedly lowered taxes while increasing spending on generally unproductive enterprises and services. For example, money spent buying bombs, while necessary, does not create as many jobs as money spent on roads, rails or other infrastructure. It also does not provide future benefits.

In 1980, it made some sense to cut taxes from high marginal tax rates in order to stimulate the production of private sector goods and services. At that time, Baby Boomers were entering the workforce, increasing their earnings and consumption, and inflation (or too much money chasing too few goods) was very high. But one very important component was forgotten: government spending actually increased. From the military build-up of the 1980’s to the wars in the Middle East to the Wall Street bailouts today, government spending has consistently outpaced tax revenues. The same thing happened at our local level, as city officials handed out generous pension benefits to municipal employees without also setting aside the funds to make those future payments.

Now, we find ourselves in the uncomfortable position of having crumbling infrastructure, decaying schools, foundering social services and deficits as far as the eye can see. And we haven’t even begun to see the worst of it, because the Baby Boomers’ have only just begun to retire and haven’t even started to tap Medicare yet.

Today, our decaying infrastructure means that our workers, our schools and our economic system are all at a structural disadvantage to our global competitors, who are better educated and better funded. Furthermore, if we allow safety nets like Social Security, Medicare and Medicaid to be weakened, it could leave the most vulnerable people in our society little more than a sneeze away from tragedy.

But it doesn’t have to end this way. We can rebuild America back to her glory. But it’s going to be hard. We’re going to have to accept cuts to our entitlements (does Warren Buffett really need Medicare or Social Security?), defense spending, delayed retirement and higher taxes, not only to pay off the debts we’ve accumulated but to make the critical investments needed to get back on track.

From my perspective, now is not the time to be cutting school budgets or infrastructure spending. With more than 16.5 percent of our work force unemployed or underutilized, the only way to rebuild our economy is to get these people back to work. And the only way to compete in a highly technical, globalized economy is to ensure that every American worker is well educated, highly skilled and highly trainable to better adapt to changing circumstances.

That’s what Tom Friedman means when he says we can have a hard decade or a bad century; a little pain today will help prevent a lot more later on.

This column is prepared by Rick Brooks, CFA, CFP®. Rick is vice president for Investment Management with Blankinship & Foster, LLC, a wealth advisory firm specializing in comprehensive financial planning and investment management. Rick can be reached at (858) 755-5166, or by email at brooks@bfadvisers.com. Rick and his family live in Mission Hills.

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