The US as a company
I hope I am doing a better job of teaching my students economics than are others who are teaching research analysts around the world. A case in point is Dick Bove, an analyst with Rochdale Securities. In an interview on August 9 on CNBC (obviously the producers on this network were poorly taught as well for they are unable to discriminate between reasonable and absurd arguments) in which he discussed the S&P credit downgrade of the US, Bove stated:
“The US credit rating would be even worse than its recent downgrade from Standard and Poor’s if the nation were judged as a private company…You’ve got a company which is losing about $1.4 trillion this year, probably will lose somewhere around a trillion dollars over the next couple of years. It owes $14.4 trillion and over the next five years that will get up to $20 trillion. So there’s no likelihood whatsoever that this particular company is able to pay down from its own resources the amount of debt that it has, nor is there any likelihood that it’s going to get rid of its deficit. If that was a real company, of course, that would be a junk bond.”
Of course, if this were a real company, it never would have been able to take on this much debt and lose anywhere close to $1 trillion in a year.
I have seen this type of comparison before, so Bove is not original. But obviously he has fallen into the trap of believing that the US should be judged on terms similar to private companies.
There are many levels on which this type of comparison is patently ludicrous. To begin with, the US Government is a very powerful monopoly with taxing powers and the ability to change the rules. There are very, very few private sector monopolies in existence today, and even fewer that have any taxing powers. There are no private companies that have the right to change the rules legally.
The US Government can change its “revenues” at any time. It does not face competition. It also can change its “expenses” at any time. Despite its outstanding debt, the US Government is capable of paying its debt obligations on schedule and in full. The US Government lacks leadership at this time, not financial leeway.
Overextended private companies on the other hand, are at the mercy of their bankers and other creditors. And in many cases, companies have been put heavily into debt by private equity investors who used the debt to pay themselves handsome returns, leaving other stakeholders to deal with the fiscal repercussions of their exuberant greed.
Bove and his ilk ignore the fact that companies do take on debt for legitimate reasons as well, not just for paying dividends and management fees to their shareholders, or for making ill-advised acquisitions. Investing in new productive capacity and technologies, in new products and services, in new business models, in employees, in the environment, etc. should enhance the competitive position of companies. These types of investments are the basis for what Josef Schumpeter called “destructive competition”, and what Michael Porter has called competitive strategies.
Finance theory is quite clear that these types of investments should be funded in part with debt.
There are many types of spending by the US Government that contribute to improving the productivity of the US economy, and the competitiveness of US-based companies. For example, spending on infrastructure, education, training, basic research, and perhaps some of the spending on health care, the courts, defense, regulatory agencies and NASA fall into this category. Imagine what the US economy might look like if the US Government had not spent money in any of these areas.
Financing these types of spending through debt is perfectly legitimate. Consequently, if someone, obviously not Bove, were to undertake a real accounting of what the US Government has done and how it has spent money, that person might discover that most of the outstanding debt of the US Government has covered productivity enhancing spending.
And the US Government debt – the treasury bills and bonds – plays a key role in anchoring the global capital markets.
Comparing the US Government to a company is ridiculous and a waste of time.
The opinions expressed in this blog are personal and do not reflect the views of either Global Brief or the Glendon School of Public and International Affairs.