SPENCE Asset Management

The Impact of Entitlements and Borrowing January 2010

Despite what you might have read about American consumers, there are millions of individuals in our nation who are not over-extended entitlement seekers. However, current levels of delinquencies on home mortgages and credit card balances are alarming. And when further considering the level of personal and business bankruptcy filings last year, one can only wonder what percentage of Americans do fit this description.

Two questions arise. First, how did America wind up adopting such a dubious culture of entitlement and borrowing?

Second, what if anything are we doing about it?

Quite similar to a biological process, a nation’s cultural history tends to evolve over time. Pivotal points in economic history often mark the beginnings of periods of more rapid cultural evolution.

By 1936, the cultural attitudes in America were experiencing rapid rates of change. In response to the banking crisis that led to the Great Depression, elected officials had become completely receptive to the idea of increased government borrowing, while also fostering a much greater sense of entitlement in the American electorate. And as early as 1932, it became a winning political tactic to demonize the image of business interests.

Before the end of the 1930’s there were dozens of new and culturally transforming literary works published. John Steinbeck’s Grapes of Wrath (1939), and other literature with similar messages, helped propel the process of government being perceived as a compassionately gentle savior of the people, while simultaneously casting businesses as nothing more than a cold heartless exploiter of American society. With Pulitzer and Nobel Prizes awarded to literary works associated with this viewpoint, the public education system jumped on the entitlement and anti-business bandwagon.

As America’s cultural sense of entitlement and willingness to take on debt gradually strengthened, the nation’s cultural sense of thrift and self-reliance were gradually subordinated. And naturally, the attitudes of America’s ever attentive and ever opportunist elected officials reflected the nation’s changing cultural biases.

By the mid 1960’s, the modern American adage that “anything worth doing is worth over-doing” was in full force. And as such, the relentless quest for a public policy-engineered utopia required ever ambitious elected officials in the federal government to subscribe to the theory that the passage of a few additional laws could somehow eliminate poverty.

Forty-five years after the so-called “War on Poverty” was initiated, we find the unintended consequences of the electorate severely over-estimating the managerial capabilities of government in evidence everywhere. In the wake of several generations of continuous government subsidies for low skilled, single parent households, today America suffers from the burden of an enormous and firmly entrenched subsidy-dependent subculture. The defining characteristics of this subculture remain unskilled, single parent, households.

Some thirty years ago the stark economic realities of government’s limitations collided with the naive world view that sees endless government-managed entitlements as sustainable. By 1980 America’s economic performance had been so dismal for so long, voters were ready to try anything different in an effort to get the nation out of the competitive rut.

Offering a more enlightened view of economic reality, pro-business, supply side-oriented politicians promised competitive revival for the U.S. through the slashing of personal income tax rates in conjunction with long overdue government restraint. However, since pro-business supply side thinkers were politicians first and economists second, once elected to power in the early 1980’s, they predictably chose to initiate the politically palatable elements of their pro-business policies first. Personal income and capital gains tax rate cuts were enacted immediately and economically effective almost immediately. However, the elimination and/or reform of woefully inefficient government programs were delayed indefinitely, causing the malaise of the U.S. entitlement and borrowing bias to continue unchecked.

Predictably, the political realities of a cultural bias towards entitlement and borrowing continue to remain pretty simple as the dawn of the second decade of the 21st century arrives. Regardless of any purported philosophy held by any elected official, government rarely if ever says no to even the most ineffective program once it says yes to it. In 2010, signs that the majority of American citizens and their elected officials have fully embraced reliance on borrowing to fund the national sense of entitlement are unmistakable. Absent the one time flood of dot.com related capital gains tax revenue windfalls of the late 1990’s, U.S. government borrowing has escalated from a previously alarming hundreds of billions per year earlier in the first decade of the 21st century, to an astounding $1.75 trillion projection for 2010. And late in 2009 we saw indications that future attempts at reforming government borrowing will once again be left to yet another toothless “bi-partisan” commission that will be predictably ignored by the army of demagogues populating both sides of America’s so-called political spectrum.

When carefully considered, some seemingly obscure and unrelated symptoms offer compelling testimony to the pervasiveness of America’s naïve acceptance of the entitlement mentality.

• Each day in America, manufacturers of motorized scooters, items that cost thousands of dollars to produce, are offered for “free.” While no precise details are provided in the marketing ads as to how these very expensive items can be given away, the implications are clear. A free scooter is readily avail able to any senior that is eligible for Medicare, even those seniors that clearly possess the means to pay for these products themselves. Accordingly, the rule of competing in the marketplace for discriminating customers is irrelevant. Instead, navigating through the nuances of the entitlement-driven diagnosis rules of the federal government has become a successful business formula. At the end of the day, the U.S. government borrows continuously to fund these types of means-ignoring entitlement policies.
• The debt remediation business has also become a multibillion dollar industry. Numerous organizations advertise their debt counseling services every day. And with debt-financed goods and/or services in hand, millions of consumers are encouraged to employ sophisticated legal tactics that will enable them to renege on otherwise binding contractual obligations. Ethical considerations are eschewed, the justification being that U.S. laws “entitle” consumers to employ these tactics.

Unfortunately, there are many other signs that America has completely transformed itself into an economically ignorant and entitlement-driven culture. One of the great areas of growth for companies providing advertising space is legal ads. While the U.S. unemployment rate soared to well over 10% in 2009 and many domestic companies continued their steady migration towards more employment-oriented jurisdictions, America’s legal industry continues to thrive. Ads recruiting new potential plaintiffs now literally flood the advertising marketplace twenty-four hours a day. The idea that law firms continuously spend big money to surf for additional legal raw material represents chilling evidence of the insidious nature of the entitlement era. These ads are an essential first step in the manufacturing processes of the legal community. Simply put, strip mining society for successful litigation opportunities is possible because entitlement-oriented juries are widely available to assist in an adjudication process that routinely fleeces so-called deep pockets. The billions of dollars pouring into these plaintiff seeking ads suggests that entitlement mentality exploitation processes are not just economically feasible, they are lucrative.

Equally amazing are the ads being run by tax liability remediation attorneys. Using the testimonials of actual citizens, this segment of the legal services industry continuously transmits the message that merely with the use of highly trained legal experts, responsibilities for paying personal income taxes can be either greatly reduced or avoided altogether. Naturally, uncollected taxes only add further to the U.S. government’s borrowing abyss.

Reviewing all of the forces that have combined to create cultural biases in favor of entitlement and excessive debt in America is one thing. Examining what we are doing about this condition is another.

In the wake of the financial crisis of 2008 many experts predicted that America would experience a sudden cultural shift away from borrowing. And as 2010 begins, there is growing evidence that millions of U.S. consumers are actually beginning to resist the temptation to borrow and spend beyond their means. However, the policy response of our government to the latest “crisis” explains very clearly how deeply the two national weaknesses (entitlement and borrowing) have become inter-connected in our political culture.

In the face of a problem created by our culture’s excessive use of debt, the U.S. government has aggressively moved to increase the sheer volume of entitlements and increase the level of federal borrowing used to pay for these entitlements. The diagnosis of too much debt and entitlement is being treated with….more debt and more entitlements.

We began this letter with the observation that millions of Americans are clearly not entitlement-seekers or debt-laden. We finish this letter by asserting that it is the borrowing capacity of this shrinking group of Americans, people who have chosen to resist the temptation to personally engage in financially-destructive behaviors that will be used to finance the regrettable biases embedded in the U.S. collective. Those anticipating a shift away from this trend would be well-advised to realize that as long as elected officials in the U.S. continue to be rewarded for fostering a culture of entitlements and borrowing, they will continue to maintain the status quo.

In the areas of finance and economics, the majority of Americans have been insufficiently educated by their parents and the public education system. This explains why the majority of the electorate has not yet rejected policies that indicate a national penchant for entitlements and borrowing is sustainable. And even more sadly for our country, history repeatedly suggests that if a dominant economic national power has collectively for a couple of generations, been more concerned with dividing the existing economic pie than it is with baking more economic pies, an international economic leadership change is pretty close at hand.

Accordingly, and from a 21st century investment perspective, next month we plan on discussing some of the risks associated with attempting to tap into less financially destructive cultural biases now evolving in other jurisdictions. Thirty years after culture transforming policies were instituted, China’s population and leadership remains squarely focused on scientific education, hard work, self-reliance, saving, and sacrificing for the future.

As such, China is clearly the rising economic power of the world.

Specifically, we will want to address in detail what the investment implications are of political dissidents in China being given lengthy prison sentences for daring to disagree openly with the agenda of the one party system there.

Life continues to be full of conflicts, contradictions, and difficult choices. As America gradually proceeds down a path that requires an exchange of its global economic leadership for what the majority of our electorate thinks can be an endless stream of entitlements and additional borrowing, navigating the global economic environment becomes more treacherous.

Happy New Year!

—Jim Spence, Eric Walton

Spence Asset Management, Inc.
2455 E. Missouri Ave. Suite C Las Cruces, NM 88001 575-556-8500

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