Can Government Spend Smarter?

We got a decent reversal off the lows yesterday. But it wasn’t enough to get investors bullish for today.

It’s clear that the stock market is not happy about the debt deal and the potential for spending cuts. On the other hand, without tax hikes to raise more revenue, spending cuts have to happen, as the current rate of spending is not sustainable. Spending cuts are probably a good idea even if more revenue can be raised.

One reason we are in this mess is because government stimulus intended to boost the economy has been largely ineffective. And I say "intended to boost the economy" instead of "designed to boost the economy" because much of the government stimulus was short-sighted and didn’t address the true imbalances of the economy.

It may not be helpful to go back and look at some of the stimulus programs, but I’m going to do it anyway, because spending smarter should be an attractive alternative in the future.

The Obama administration passed an $830 billion stimulus package that sent money to state and local governments for infrastructure improvements, there was the cash-for-clunker program, the first home buyer credit, and tax cuts.

These items pushed the deficit higher, but none of them have had any kind of long-term effectiveness. They were all temporary measures. They were gimmicks.

Where would we be if that money had been spent on initiatives that would actually create jobs? I guess we’ll never know. But as a business owner, I do know that surviving a crisis requires investment. Not reckless spending, but investment that can lead to growth.

For all the talk about natural gas as transition fuel, for instance, the government did nothing to push its adoption. A public option fro Obama’s healthcare bill would have provided productive jobs and created real competition for health insurance. But the administration balked and gave us a healthcare bill that simply raises prices. Ill-conceived financial regulation is costing jobs and not providing real protection.

I’m sure we can go on and on detailing the missteps. The bottom line is that government needs to spend smarter. Yeah, good luck with that…

Gold is ramping again. Traders are pricing in the probability that Fed Chief Bernanke cracks under the pressure and launches QE3. Yes, QE3 will be inflationary, perhaps even mores so than QE2. And QE3 can’t create jobs.

But let’s not forget who Ben Bernanke is. Bernanke earned his stripes with his studies of the policy response in post-Depression America. And what he sees is spending cuts, protectionist trade policies and tightening monetary policy.

Bernanke believes these reactions turned a recession into a deflation based Depression. And he is determined to avoid that at all costs, literally.

I have no idea what the Fed might unleash on the market, but traders can sense his trigger finger getting itchy. And they are buying gold.

How important is tomorrow’s Nonfarm Payrolls number? I’d say very. Even a little improvement in unemployment will provide some needed relief about the economic situation.

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