Our Government: A Business Without Assets?

Before I finish my series on the incredible transition taking place in the publishing industry, I need to comment on the current controversy about our government’s debt and deficit. There’s an important pair of terms related to debt and deficit that aren’t being discussed right now, and they should be.

Clive Crook of the Financial Times asserts that President Obama’s new budget for 2010 is only a “”minutely worded wish-list,” that most likely won’t be honored by Congress. All of us probably agree with that statement. But Crook also  believes the “only remedies [for the US debt/deficit dilemma] are lower spending and higher taxes.” I strongly disagree with that. Only one-third of the U.S. deficit is paid for by taxes, and there IS another way to approach the US government’s debt/deficit problem.

Debt vs. Deficit: What are they?

Debt, as we all know, is what we owe. Sovereign debt, i.e., the debt a country owes, is fast becoming a concern not only abroad, but here. In regard to the US stock market, Uri Landesman, portfolio manager at ING bank’s investment wing told the Wall Street Journal, “Clearly, the sovereign-debt worries are first and foremost for the market right now.”

There’s a lot of agitated talk about our deficit too. But what’s a deficit?

Let’s say you pay all your debts using a credit card. When you receive your statement, your debt is the total amount that you owe to your credit card company. Your deficit on this statement is your credit limit. That’s the total amount that Visa or Mastercard would allow you to borrow.

Many of us have assumed our national government had an unlimited credit limit and could just go on printing money to pay its debts. That isn’t true.

Congress is like a credit card company–it sets limits on the national deficit and the national debt. And it has the power to prevent the federal government from exceeding those limits.

Do you think it’s odd to be discussing our government’s budget in personal terms by comparing it to a household credit card bill? Well, it is. In modern economics, comparing “macro” with “micro” is strictly forbidden.

Comparing macro and micro levels of the economy

The fact is that macro and micro comparisons have to be made, but not, as they were in the olden days of “political economy,” between government and households. Comparisons today have to be made between government and business.

That’s because of the modern Republican Party’s agenda. The Republican Party in the US has long stood on the side of “Business,” large or small. It is still doing so, but with a new twist. In addition to downsizing government and letting business take over many government functions, Republicans aim to give our government a complete makeover. They’d apparently like government to become a business.

What’s missing in the debt and deficit debates

The macro level of our economy is our national government. The micro levels of our economy are businesses, households, and individual consumers. If we compare the federal government with business, we can easily see what’s wrong in Congress.

What’s missing is a serious discussion in Congress of the US government’s debits and assets. At the very least, those who believe government ought to operate more like a business, and produce products, i.e., “results,” that can be measured in terms of cost-benefits, should be asking for debit and asset information. So should Democrats in order to defend their stimulus programs. And so should taxpayers!

Debits vs. Assets: What are they?

What are debits and assets? Roughly speaking, debits (sometimes called “liabilities“) are things that take money out of your pocket and assets are things which put money into your pocket. (If you remember, I talked more about this pair of opposites in my previous blog, “Part I: Banks and People.”)

To go back to the credit card analogy, debits are the items listed on your monthly statement. Debits are what you spent your money on last month. Add up all your debits over time and you get your total debt. But on a business balance sheet (or a household budget), at some point, your debits need to be offset by at least some kind of assets or you’re headed for big trouble. Even if it’s only an unemployment check, you’ll need an asset to offset your debt.

In my previous post, “14 Trillion and What Do You Get? Another Day Older and Deeper in Debt,” my advice was:  “If you do go into debt, it should be for an asset that you are sure will make money for you.” This is true for individuals, businesses and households. But what about our government? What’s it doing about its assets?

Assets? What assets?

We have no idea of the total worth of our government assets. John Rutledge of Rutledge Capital says that financial assets of the US. Government totaled $1,261 billion in the fourth quarter of 2009. State and local governments owned financial assets totaling $2,555 billion. These amounts change, sometimes drastically so, every quarter.

Dr. Rutledge, too, wonders why economists don’t keep track of all US government assets.

But our government doesn’t even know its own assets. An old friend, Bill Murray, who was helping fix up the house I now live in, loves to discuss precious metals as well as tools. One day, out of the blue, Bill mentioned platinum.

“It’s our most valuable metal,” he explained, “because it has so many more practical uses than the precious metals.” Bill told me that the market price of platinum was way off because, “for security reasons, our government owns a lot of it.” He said, “Even they don’t even know how much they’ve got of it.”

Dr. Rutledge states that the Fed only tracks the financial assets owned by our governments. The Fed doesn’t track tangible assets, (things like desks, cars and platinum). And to quote Dr. Rutledge, “… any analysis of the economy that focuses on spending or saving or budget deficits alone, to the exclusion of the balance sheet [assets vs. debits], is almost certain to be wrong…”

When you’re in a financial hole, squabbling over specific items of spending on your credit card without considering if they’re “debits” (things that take money out of your pockets ) or “assets” (things that bring money into your pockets) isn’t how you get out of debt.

But our Congress spends its precious time debating only the size of expenditures and/or whether expenditures are too extravagant, e.g. gold toilet seats for the military. The only time we ever seem to hear about our government ‘s assets is when they’re being sold.

A Biggest Loser Auction?

Because of the financial crisis, as well as its own peculiar budget process, in 2009 the government of the State of California was forced to hold a giant auction of its assets. Other states have been doing the same thing.

Government auctions are often described as sales of “surplus” items. But an auction isn’t like a rummage sale where one gets rid of old, useless, junk. An auction is usually a sale of valuable assets that can be used to make money.

Things do look dire when even governments, like companies, households, or individuals, have to sell off assets just to survive. What next? Will we soon see ads for giant auctions on the lawn of 1600 Pennsylvania Avenue?

Copyright © 2010 Nancy K. Humphreys

Source:  Dr. John Rutledge quotes are from his blog article,  Total Assets of the U.S. Economy $188 Trillion, 13.4xGDP


#1 Mary O'Sullivan on 02.11.10 at 4:22 pm

Really interesting. Once again, you made difficult economic ideas understandable. Even so, I am simply weary of all the sqabbling in congress. I want to send them all for a time-out, not letting them back in session until they agree to speak to each other politely.

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