There’s a open mic citizen’s meeting tonight in the town I live in to discuss the upcoming city budget. Its the usual debate —- cut taxes or hold revenues. From the beginning this debate is framed incorrectly.
The U.S economy is, at best, bottom bouncing, and is quite likely stalled and headed for a protracted period of fiscal uncertainty and duress.
The American consumer drives our economy and has been “pounded soundly about the head and shoulders”. Reeling from high unemployment, flat wages, rising prices and sinking home values — the consumer has has retrenched. After sitting around the kitchen table, families made tough decisions about spending differently and hoarding cash. Piano lessons or new shoes — choose — you can’t have both.
Corporate America — reacting to the softer revenues from the hunkered down consumer — also sat around their own board tables and made similar tough decisions to spend differently and hoard cash. In fact, cash reserves in top US corporations are at all time record highs — and with cheap interest rates, even companies flush with cash are borrowing more just to have a bigger pile of cash on hand. Fund new projects or hold onto existing headcount — choose — you can’t have both.
So now its government’s turn — why aren’t our politicians talking about spending differently and hoarding cash ? Here’s a guess……
False Belief #1 — Government’s are more prone to believe they can control revenues than consumers and corporate America. “We can’t cut millage rates as we need to control revenues”. “We need “$x” to fund our operations so we have to hold revenues”. Consumers and Businesses don’t for a minute believe they can control revenues — so over the short-term they assume the worst, hope for the best and find ways to make do with less until the storm clouds pass. Neither assume that they have any control over the top line — governments shouldn’t either.
False Belief #2 — Government’s are more prone to think of costs in terms of growing them or cutting them, not in terms of spending differently. When consumers and businesses approach reviewing spending — they don’t set out just to cut costs (though they certainly end up there), they set out to re-set the bar on base expenditures and discretionary expenditures. Against softer revenues they re-prioritize what’s necessary, what’s important and what’s something they can delay or do without. It starts at the bottom — is limited by some absolute $ spending level — and when the $ are gone they’re gone. It’s not about the cuts — its about the spending.
Its only rational that when consumers are revamping their spending, and corporations are revamping their spending, that both expect their governments to do the same. Spend differently and hoard cash. Sounds pretty good to me.