It’s common to hear candidates for executive branch offices claim that, if elected, they will run their organizations like businesses. This isn’t an unreasonable position; they have many attributes in common. So what happens when we start to look at the federal government as a business? Let’s explore that for a bit.
In business, cash comes from four sources: income, asset sales, debt issuance, and stock issuance. The same is true for government. Income comes from tax, fee, and fine collection. Asset sales is virtually identical to private business. Debt issuance is in the form of government bonds. And then there’s stock. For the federal government, stock comes in two forms.
First are voting shares, which are nontransferable. Each citizen over the age of 18 (with a few exceptions) automatically receives one voting share for free. Because they are nontransferable, there is no market for buying and selling the shares. As a result, voting shares have no monetary value. The federal government equivalent to the board of directors is Congress, who must ultimately answer to the shareholders (voters) by periodic election.
Second are non-voting common shares, which are transferable. In the case of the federal government, these shares are called “dollars,” and they are extremely actively traded in millions of markets worldwide. These shares are subject to dilution in the same way as common shares of companies. One of the more notorious examples of this dilution is the Weimar Republic‘s hyperinflation of 1923. Clearly, common share dilution is a significant economic concern, and the government must tread very lightly in issuing more money as a means of paying for government services.
I will return to this notion in future postings, but for today let’s focus on debt.
Businesses use their debt and equity to increase cash, which allows them to make expected return over the life of the asset is greater than the marginal cost of servicing the debt or of stock dilution. If the capital expenditures are funded by debt in this fashion, it is sometimes referred to as “good debt,” because the business ends up better off in the long run by having issued the debt than it would have been had it not issued the debt. for durable items. This is a smart move if the
Established businesses in poor health may also use debt and equity to pay for day-to-day expenses, but this is unsustainable and should be used in only the most dire of circumstances. This is sometimes referred to as “bad debt,” because the business ends up worse off in the long run by having issued the debt than it would have been had it not issued the debt. Of course, if the alternative to issuing the debt is that the business shuts down, then the long run becomes rather irrelevant. Nonetheless, this scenario is commonly a precursor to a bankruptcy filing.
In government, similar rules apply. In a perfect world, day-to-day expenses are funded by current tax receipts, while long-term investments may be funded with debt. Using debt to pay for basic operating expenses of government is unhealthy and unsustainable.
The hard part is determining what constitutes a long-term investment. Following are a few examples, along with justifications of calling them investments.
· Education of the populace can be considered a long-term investment. Better-educated people typically command higher salaries, which generates more income tax revenue, plus more sales tax revenue since they have more disposable income. They are also less likely to claim government-subsidized services for low-income people.
· The war in Iraq could have been considered a long-term investment, since the US economy is heavily dependent upon low-cost petroleum. Had the cost of the invasion and occupation of been in the $100B range, and had the resultant government been especially friendly to the United States, this might have paid off as an economic investment.
· The subsidies given by the federal government to the railroad industry was an investment that paid off handsomely. Despite the obscene amount of embezzlement perpetrated by people such as Leland Stanford, the railroads reduced trade friction sufficiently to grow the US economy by leaps and bounds. The taxes collected from economic growth exceeded the investment made.
It should be clear from this analogy that a simplistic “pay as you go” model is as foolish a notion for government as it would be for business. Just as businesses can be exceptionally profitable even while maintaining unending debt, so too can government. What matters most is not the presence or absence of debt, but rather the use of the proceeds generated by issuing the debt.
Ultimately, the investment question is at the root of an . In determining whether an economic stimulus package is a good investment, you need to compare the net present value of future tax receipts without the package against the net present value of future tax receipts with the package, minus the cost of the package itself, including the interest on the debt. Of course, it’s easy for the right to claim that the no-stimulus scenario has a lower cost than the stimulus scenario, just as it’s easy for the left to claim the opposite. Absent a control, neither can be conclusively proven.
Fiscal conservatives sometimes claim that the government should stay out of economic stimulus altogether, due to a minimalist view of government. Assuming that the economic stimulus is a good investment, in that it generates a net positive return, any intellectually honest fiscal conservative will support it, because it translates to less tax revenue needed to provide the same level of service.
In any case, hyperbolic claims from the right that money supply via increasing debt, rather than via equity dilution, inherently improves the economy relative to the status quo, regardless of what it’s spent on. You can always live better in the short run by borrowing. Beyond that, the only genuine argument regarding in a stimulus package is over the most effective uses for the money, and whether those expenditures outweigh the additional debt burden. has a negative impact on the short term economy simply don’t hold water. Anything that increases the
Next time, I’ll delve deeper into this question, and examine where the stimulus money was slated to go. This will provide an opportunity for us to more accurately determine the potential effectiveness, and discuss how useful the stimulus bill really was.