The Government Can’t Really Save For The Future, It Can Only Invest

Consider this an adendum to Paul Krugman’s thoughts on the non-equivalence of climate change and entitlement spending as long-run issues, but something that I don’t think is well understood is the extreme difficulty that a large sovereign state like the United States of America would have in saving for the future.

If you think about a household that’s facing some obvious future expense (retirement or kids going to college) the thing you want to do is reduce consumption below income. The idea is to accumulate financial assets—stocks and bonds and bank accounts—rather than refrigerators and restaurant meals. Then in the future when you need consumption to exceed income you can liquidate your financial assets. This same strategy also works great if you’re Norway or Abu Dhabi or some other small country that wants to transform natural resource wealth into a diversified portfolio of financial assets. But for a gigantic country like the United States to accumulate a large stockpile of financial assets would be funny kind of socialism. You’d be purchasing the means of production from its current owners. That’d be likely to raise a lot of awkward political questions about what to actually do with the government’s equity stakes in enterprises. It’s also not clear what you could actually accomplish this way, since liquidating the fund would crash the stock market.

The result is that we’re basically left with a much more primitive kind of savings problem. Something closer to a farmer in the pre-industrial era who’s trying to save up for winter. To save for winter you can’t just sell your surplus food during the fat months and stockpile financial assets. During the lean months there won’t be any food for sale. You need to actually stockpile surplus food and other tangible commodities. That means smoking your meat, finding a dark cool place to stash your potatoes, chopping a bunch of firewood, etc. 

The government equivalent would be something like Maryland Governor Martin O’Malley’s idea of raising gasoline taxes to pay for transportatiom projects. The idea is to tradeoff consumption in order to obtain long-lasting goods. The federal government, somewhat unfortunately, doesn’t engage in proper balance sheet accounting. So if you borrow $10 million to do road repairs, that shows up as an increase in indebtedness. The right way to think about it, however, would be that the road is a depreciating asset that has a value. Every year it goes unrepaired, its value declines. So borrowing $10 million to fix the road might improve the government’s net financial position, depending on the nature of the project. Right now we’re at a time when it’s never been cheaper to finance federal borrowing. Consequently, borrowing money and spending it on sound projects of long-duration is the best way we have to “save” for the future even though it technically adds debt. Now of course spending money on something dumb doesn’t help. But deferring repairs and useful investments for the sake of borrowing less is going to leave us poorer in the future rather than richer.