The Government Needs Balance-Sheet Accounting

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.

Back to the federal budget. When the U.S. government borrows money and builds an aircraft carrier, it hasn’t just taken on debt it’s acquired an aircraft carrier. And when the U.S. 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.