It should come as no surprise that the biggest drag on economic freedom for the US is government spending.  Due to the explosion in spending from the $814 billion stimulus bill, the double-digit increases in appropriations, and other spending increases, government expenditures will reach $3.5 trillion in 2010. As a share of the economy, spending in 2010 will be 23.8 percent of GDP, compared to a forty-year historical average of 20.7 percent.

It seems with each passing week, this level of government spending and the resulting deficits are making headlines.  Just last Thursday the Congressional Budget Office (CBO) projected that this year’s deficit will likely reach $1.3 trillion. As a share of the economy that is 9.1 percent, roughly three times the average of the past 40 years. The debt held by the public is projected to rise to $9 trillion – or 62 percent of the economy – this year, nearly twice the 40-year historical average. Total debt, including borrowing from the Social Security trust fund and other federal funds, will rise to $13.5 trillion – equal to 93 percent of our annual economic output.

Despite these ills, the rhetoric coming from Speaker Pelosi, Senator Reid and the Obama Administration continues to promote the idea that we can borrow and spend our way back to prosperity.  Just last summer, Vice President Biden even suggested that, “We have to go spend money to keep from going bankrupt.”

Yet today we face near trillion dollar deficits as far as the eye can see, continued warnings of a potential downgrade of US Treasuries from the rating agencies, an unemployment rate stuck around 9.5 percent, and an economic recovery described as “anemic” by the CBO. The Chairman of the Federal Reserve, Ben Bernanke, continues to warn that this path is simply ‘unsustainable.’ When do we rethink the approach?

Certainly American businesses are waiting for it. Because of the failure to address these out of control deficits (and the general anti-business message coming from Washington) US businesses are hoarding a record level of cash.  Instead of investing in research and development or hiring new workers with this money, these businesses are sitting on the sidelines holding $2 trillion in cash waiting in fear out of what might come next from Washington.

The belief that this level of government debt is “necessary” for economic growth flies in the face of both reason and history. In a recently published book entitled This Time is Different, two economists (Carmen Reinhart and Kenneth Rogoff) compiled a comprehensive look at financial crises, government defaults, and inflationary spikes in 66 countries over eight centuries.  A common theme found by Reinhart and Rogoff is that once a country’s debt to GDP ratio hits 90 percent, economic growth slowed by at least 1 percent. Despite what some may claim, this time is not different. At 93 percent of our GDP, our current debt levels are hurting, not helping, an economic recovery.

Again, following the Canadian model would help us tremendously.  In 1993, Canada faced a deficit of about 9% of its GDP and stagnate growth. Believing that severe cost cutting in the public sector was the only way to sort Canada's finances, the government cut back public spending and converted the deficit into a small surplus. During the following decade, the Canadian economy soared; growing 41 percent. 

A tolerable business climate and sustainable fiscal policies are requisites for economic growth.  Thus far, Washington has failed to deliver on either of these and our economy continues to pay the price.  Now, Mr. President, is the time to rethink the approach.