Friday, July 5, 2013

Prosperity, Austerity, and Prudence

Government's bottom line

OK, I know, there's that word again: prudence. But along with prudent, what do they mean and what images do they conger up? Doddering, old-fashioned, tight-fisted, selfish? Let's talk about what it doesn't mean for economic policy and government expenditures.

Government austerity is not prudent in a poor economy.

Government extravagance is not prudent in a prosperous economy.

The challenge for profligate legislators is that government expenditure has been extravagant for the past 20 years in good times as well as in bad. We (cut taxes / spend more) when the economy is hot and we (cut taxes / spend more) when the economy cools. Now we need to step away and plan.

Business has a bottom line: profit or loss. Government has surplus or deficit. Just like a good business, good government in good economic times calls for good planning and prudence: paring ineffective, inefficient, and antiquated programs; making the tax code lean, transparent, and equitable; and right-sizing the enterprise. All this is done in good times because the enterprise is strong, labor and goods are relatively expensive, and workers displaced by right-sizing and productivity gains are more apt to find other work. Good businesses do this when they're strong so they are lean and mean to survive when times get tough.

But instead, like a poorly run business, "we the people" spend wildly and bleed off tax revenue in good times because it's politically more popular to give than receive. And because we continually throw fiscal gasoline on a hot economic fire, the fuel burns brightly but quickly – leaving dull embers that are slow to rekindle.

Government is not a business: it does not measure success in a profit/loss statement and is not challenged by market forces. Over the past 20 years Congress has shied from the hard work of prudent governance, drawn by the flames of political expedience and self interest. Now, the flames are weak. Slowly stoking and feeding the fire will bring it back to life. Too much fuel at once is waste; too little starves it.

Prudence, in spite of its outdated image, is the proper approach in good times and bad. Extravagance and austerity merely make the highs unsustainable and the lows inescapable.