The Government Needs Balance Sheet Accounting

A blog about business and economics.
April 18 2012 10:51 AM

The Government Needs Balance Sheet Accounting

1334760691426

The latest in the venerable tradition of fallacious comparisons of a national budget to a household budget is brought to you by Mitt Romney's presidential campaign. This kind of exercise suffers from a variety of problems, several of which are detailed by Brian Beutler but over time I've come to think the biggest issue with these analogies is that they completely ignore the "assets" side of the ledger.

Think not about a household, but a firm. For example a leverage buyout firm like Bain Capital that Mitt Romney used to run. When Bain was founded, it had no debt—it was brand new. But it right away set about to indebt itself. Indeed, piling on debt is integral to the whole private equity business model. First you go out and raise some equity capital from investors, and then you go to a bank and raise a bunch more money by borrowing it. If your firm grows and thrives, the nominal aggregate debt load will keep going up and up. That sounds insane until you remember that Bain isn't just borrowing money to throw wild cocaine-fueled parties. It's buying companies. On the one hand, you add a bunch of debt to the liabilities side of the balance sheet. On the other hand, you add a bunch of companies to the assets side of the balance sheet. And the business proposition is that through some combination of management expertise and financial engineering Bain causes the average value of its assets to exceed the average value of its liabilities.

Advertisement

Back to the federal budget. When the US government borrows money and builds an aircraft carrier, it hasn't just taken on debt it's acquired an aircraft carrier. And when the US government borrows money and pays a teacher to teach a kid to read, American society gains a literate citizen.

So there are two relevant questions to ask yourself about any kind of expenditure, neither of which is about debt. One is how valuable is a given purchase (of a car or an aircraft carrier or a company) and the second is what's the most affordable way to raise the funds. Under ordinary circumstances, it makes a lot of sense for the government to finance its expenditures through taxes. But under the unusual conditions of a depressed economy and negative real interest rates on government debt, it's much more reasonable to finance purchases through borrowing. A separate issue is what kinds of things it makes sense to purchase. Obviously one important philosophical difference between Mitt Romney and Barack Obama is that Obama thinks lots of things the federal government buys (health care and food for the needy, schools, transportation infrastructure, public health and safety regulators) are valuable whereas Romney thinks that only its military purchases and health care for the currently elderly are valuable. But due to his professional background, Romney should be almost uniquely well-situated to appreciate the idea that given today's circumstances whatever the government does buy should be bought largely with debt.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

TODAY IN SLATE

Sports Nut

Grandmaster Clash

One of the most amazing feats in chess history just happened, and no one noticed.

The Extraordinary Amicus Brief That Attempts to Explain the Wu-Tang Clan to the Supreme Court Justices

Amazon Is Officially a Gadget Company. Here Are Its Six New Devices.

Uh-Oh. The World’s Oceans Have Broken Their All-Time Heat Record.

The NFL Explains How It Sees “the Role of the Female”

Future Tense

How to Keep Apple From Sharing Your iPhone Data With the Police

Food

How to Order Chinese Food

First, stop thinking of it as “Chinese food.”

A Simple Way to Keep Apple From Sharing Your iPhone Data With the Police

The Country Where Women Aren’t Allowed to Work Once They’re 36 Weeks’ Pregnant

The XX Factor
Sept. 18 2014 11:40 AM The Country Where Women Aren’t Allowed to Work Once They’re 36 Weeks’ Pregnant
  News & Politics
Weigel
Sept. 18 2014 8:20 PM A Clever Attempt at Explaining Away a Vote Against the Farm Bill
  Business
Moneybox
Sept. 18 2014 6:02 PM A Chinese Company Just Announced the Biggest IPO in U.S. History
  Life
The Slate Quiz
Sept. 18 2014 11:44 PM Play the Slate News Quiz With Jeopardy! superchampion Ken Jennings.
  Double X
Doublex
Sept. 18 2014 8:07 PM Crying Rape False rape accusations exist, and they are a serious problem.
  Slate Plus
Behind the Scenes
Sept. 18 2014 1:23 PM “It’s Not Every Day That You Can Beat the World Champion” An exclusive interview with chess grandmaster Fabiano Caruana.
  Arts
Brow Beat
Sept. 18 2014 4:33 PM The Top 5 Dadsplaining Moments From The Cosby Show
  Technology
Future Tense
Sept. 18 2014 6:48 PM By 2100 the World's Population Could Be 11 Billion
  Health & Science
Science
Sept. 18 2014 3:35 PM Do People Still Die of Rabies? And how do you know if an animal is rabid?
  Sports
Sports Nut
Sept. 18 2014 11:42 AM Grandmaster Clash One of the most amazing feats in chess history just happened, and no one noticed.