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How full is the Glass?

Business leaders are by nature folks who see the glass as half full. Optimism is in their DNA. They set …

Business leaders are by nature folks who see the glass as half full. Optimism is in their DNA. They set out to accomplish things and one can’t do that if doubts trump action. Hamlet would not have made a good CEO. So when we asked a cross-section of CEOs to give us their outlook for the coming year (See Agenda2010) and beyond, we were struck by their twin concerns about rising government spending and increasing taxes and regulations, as well as the effect both would have on what they regard as a fragile economic recovery.

The concern is not misplaced. Total federal debt is expected to grow from $5.8 trillion in 2008 to $11 trillion by 2019.  That is 41 percent of GDP in 2008 becoming 82 percent of GDP by 2019. A tidal wave of debt from Social Security, Medicare and Medicaid will push total debt to 320 percent of GDP in 2050 and 750 percent in 2083. In 2019, interest payments alone on the debt will be $100 billion more than the President projects to spend on the whole Department of Defense. Federal spending, which has increased under both parties, has reached a point where it can no longer be sustained. As frightening as healthcare reform and cap and trade are, the truly scary issue is runaway entitlement spending for the simple reason that our incomes are not growing as fast as our spending. The “economic stimulus” debt alone will cost every citizen $280 a month for the rest of their lives.

If the sentiment we tapped is any guide, more business leaders are sensing that what’s at stake here is not just a routine post-recession recovery but the ability of our economic system to grow and generate jobs for everybody.

In an enterprise economy, investment decisions are based on expected revenues versus expected costs and are measured by the success of the investment based on the realization of these expectations. When government chooses to direct investment decisions as it would when the one sixth of the economy represented by the healthcare industry is effectively taken over, a very different dynamic emerges. For starters, politicians invest other people’s money, not their own, so there is a weak incentive to evaluate the true performance of where the money goes. In a more regulated and controlled economy we could be looking at 1 to 2 percent annual GDP growth instead of the 3 percent or better performance that has been the post-war average for the U.S.

It is far from certain that this is our fate, but judging from signals, the warning signs are there.

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