Doylestown Wealth Management - LPL

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P: (267) 864 - 2000 | F: (267) 864 - 2010

January 2020 Budget Commentary

Can’t Stop the Music

This commentary has argued vociferously against the theory that would claim (without any evidence) that the danger of the expanding government deficit resides in the ordinary constraints of reckless borrowers—default and ruin.  Rather, we would suggest that the trouble lies instead in the heightened influence that federal spending has on the direction of the nation’s economy and the distortions and inefficiencies that it invites.  Right now, two of the biggest growth areas of the American economy, medical and technology, are supported by Washington’s budget priorities, health care and military/security spending.  The danger is that the discussion starts to focus on the necessity (for the economy) of appropriating the money without determining what it buys.  That is to say, it becomes more important to spend the money rather than consider what the country is getting for it, and whether the same goals might be accomplished for less.

Take the health care system, for example.  Many people are unaware that the federal government currently provides insurance coverage for roughly half of Americans, and that Washington laid out roughly $1.3 trillion for health care expenditures last year, or about 40% of the money spent on actual care (hospitalization, procedures, doctor visits, prescription drugs, etc.).  Now suppose that through some miracle, we could spend 20% less for the same or better outcomes (you know, like other developed countries).  Saving $250 billion would certainly shrink the deficit, but it would cause a firestorm of concern over profitability in the health care sector and economic growth in general.  It is not much of an exaggeration to say that the American economy relies on overcharging for health care, and that much of those costs are borne by the federal government. 

Compare this with the policy battles over closing military bases in the 1990’s.  When the Cold War ended with the dissolution of the Soviet Union, the assumption was that defense spending could safely be cut—some might remember talk of a “peace dividend.”  And while the fights over the details of which installations to shut down were bitter, there was little support for the idea that we should keep bases open simply for the sake of the jobs involved.  Politicians of all stripes thought that reducing the deficit was a desirable outcome in general, even if they hated the idea of closing facilities in their districts and states.  This stands in sharp contrast to 2020, where the deficit is barely discussed in policy circles, and there is little public support for reducing it general.

So what’s the problem?  If the deficit isn’t an operational issue for the government, and there is no “crowding-out” of projects due to lack of money, why should we be concerned?  In short, we should care because the federal government is creating money to buy outcomes with no practical value.  We used to make fun of the “socialist workers paradises” for this kind of thing, when they lavished money on elaborate monuments and military parades while ordinary consumer goods were shoddy and scarce.   Their systems rewarded apparatchik parasites who produced nothing useful while the productive capacity of the nation suffered.

If you compensate people for not doing anything useful, they will continue to do nothing useful.  If you pay companies which don’t deliver, they will continue to not deliver.  And just because the US government can spend money on whatever it likes doesn’t mean it needn’t make sure it is actually getting what it has ordered.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  

Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Doylestown Wealth Management, Inc. are separate entities from LPL Financial.