PrintFebruary 17, 2011
Creative Destruction and the Federal Deficit
The President announced the 2012 budget of $3.73 Trillion with an expected deficit of $1.1 trillion. The massive deficit combines with the three prior years' deficits of in excess of $1 Trillion each which will push the national debt beyond $16 Trillion.
When combined with the exploding state deficits and other unfunded liabilities, the debt crisis will begin to unfold rapidly and unpredictably for our citizens. A national disaster is in the making.
Republicans in Congress responded with demands for budget cuts of $100 billion.
The current debt crisis requires so much more than a band aid. We need a tourniquet to stop this hemorrhaging. Cuts of $100 billion are not even a good start yet such cuts may be all that is politically possible at this point. Such a political reality sets the stage for the disaster that is sure to follow.
Some may question the need for caution. Some may underestimate the nature of the concern. After all, our professors taught us that fiscal policy and the use of government to smooth out the business cycle is a legitimate way to govern.
This time things are different. Fiscal and monetary policies, as with all economic measures, operate within constraints. The constraints have all been broken and the effects of these fiscal and monetary policies are uncharted and will lead to extremely volatile results.
The issues facing our nation are profound and made more so because of the constraints of our aging population, the coming retirement of baby boomers, the decline in education quality and a voter turnout of less than 30% in the 2010 elections does not bode well for reform.
I specialize in keeping organizations out of bankruptcy. In doing so, I have found some elements that are critical to the success of the turnaround of the business. Most organizations ignore corrective actions early on such that a full blown economic crisis ensues. For economies, this is part of the Creative Destruction described by Professor Schumpeter as part of the natural economic process.
It is natural for a people to ignore warnings until it is too late. Enforced discipline is apparently preferable to financial self-discipline.
First for a turnaround to be successful everyone must understand the critical problems being faced. Everyone must be willing to sacrifice. I contend that with only 30% of voters engaged, we, as a nation, are not on the brink yet. This will result in too little being done too late.
The $100 billion in cuts may be all that is palatable to the electorate right now. Unfortunately, this token cutback is not sufficient to stop even one month worth of excess spending.
True reform is required but my belief is that it is not politically acceptable as yet. Ending the Departments of Energy and Education come to mind as possible candidates for cutbacks, but I doubt that such cut would be enacted before the crisis become so severe as to not make any difference.
Second, the turnaround requires all to take a long term view and not a short term view. Self discipline must win out over self-indulgence.
If no one is willing to accept change or cut backs then all cuts will be cosmetic in nature and not yield substantive results. Ford Motor Company and its unions negotiated the tough issues and solved them. They will emerge a great company and will survive. They remembered their customer and their dealers not just themselves. GM took the easy way out and will lose in the long run.
A turnaround is not without discomfort. The longer the fixes take to be enacted, though, the more painful the cure. Social Security, for example, was first identified as a problem in the 1970's yet no substantive corrective actions were taken. The final Social Security fix will not be pleasant but it will be done.
Third, a successful turnaround requires spending less than you take in and not increasing your revenues at the expense of controlling your costs. Government cannot make up its deficiencies by volume!
Fourth, there cannot be any sacred cows in a turnaround. Every department must be viewed and waste eliminated. In the Federal government alone, the effort must be undertaken to remove incompetent managers and employees to make government more effective and less costly.
Finally, the customer must take center stage. In a government, the customer is the taxpayer. It is the person paying the bills not the recipient of the government largesse but the financier of the government must be looked at as someone to nurture and not vilify.
Without the steps above enacted in a timely manner, the turnaround will not work. The failed turnaround is marked by a situation in which the solution is forced upon us. I fear that is where we are headed.
Our creative destruction is underway. The bad news is that it is not stoppable any longer. The great news is that in the long run our vibrant people will survive and a greater nation is likely to emerge, but only if we decide to get engaged in the fight and strive to remain faithful to the founding principles of our Nation and our Constitution. I am confident that we will.
Frank Ryan, CPA specializes in corporate restructuring and lectures on ethics for the state CPA societies. Frank is a retired Colonel in the Marine Corps Reserve and served in Iraq and briefly in Afghanistan. He is on numerous boards of publicly traded and non-profit organizations. He can be reached at FRYAN1951@aol.com.
