Government is not hurting the economy – service economy it’s hurting itself

The Washington Post article by Ezra Klein, “Government is hurting the economy – by spending too little“, brought to my attention by my friend Michael, attempts to convince us that the government spending is the key to the robust economy. The statistics seem to work in Mr. Klein’s favor. The government spends less, the economy dunks.

Source: Der Spiegel 5/11/12

We all know, the statistical data can be interpreted in dozen different ways. One obvious conclusion from this article is the increased dependence of the service economy on the government spending. Just take a look at the Der Spiegel graph showing the correlation between the national debt, manufacturing jobs, and foreign trade deficit. Loosing well-paying factory jobs leads to an increasingly unstable service economy.

Want a proof? Why would a real estate bubble affect the US economy in such a devastating way? No, it’s not because of the foreclosures but because of the lost construction jobs in both residential and commercial markets. Housebuilding is one of the last, true manufacturing niches that remain in the US. Of course, until, someone in China develops an inexpensive way to build modular homes and ship them with ready-to-assemble manuals.

The basic foundation of Mr. Klein’s article if simply misleading. How is the “government” founded? Government this and government that. Government would not exist without OUR money. So really, we are already spending the money and helping the economy, except, in the confiscatory manner.

Is the private sector without a fault? Of course not! shipping thousands of jobs abroad to raise profits for selected few, killed the internal balance of making and spending money by the middle class (if such still exist). Service economy will never be able to fill the gap left by the heavy industry.

US government to the rescue. The interconnected paths of the private and government spending is becoming more and more important to the economy. With the federal government spending our money in every possible way, no wonder private companies look up to the mighty uncle Sam to throw them a bone. Cash for clunkers anyone? Electric vehicle credits? Military contracts? Shovel-ready jobs? Everyone jumps on those government contracts.

So the real question is, how can US survive without the artificial government spending? The larger slice of the economy is overtaken by the government, the more risky the economy becomes. PIIGS countries anyone?
Unfortunately, once the government starts growing without a control, going back is almost impossible without an unpopular and devastating cuts. By the same token, there is a limit of taxation by the government. How much tax confiscation will take for people to revolt? Learning from Gerard Depardieu and Nicolas Sarkozy, about 75%.

Finally, I would read Mr. Klein’s post as a warning and a lesson. If we continue to depend on the government spending, let’s just nationalize the economy and stop pretending that our current system is a pure capitalistic ever-profit-giving golden goose. Perhaps Mr. Obama should put aside the popular replacement issues (healthcare, immigration) and concentrate on what’s the most important at the time – our wallets.