Saturday, February 11, 2012

Government as a business? A continuing exploration

Matt Yglesias makes an important point about how we think about debt:
This does, however, raise the interesting and oft-neglected point that corporate accounting and government accounting operate along very different principles. If I'm running a modestly profitable burrito company and decide I could be making even more money if I opened even more stores and so go sign some leases and spend a bunch of money building out the new kitchens, we don't register this as suddenly "spending" far exceeding "revenue" and freak out about the deficit. What we say is that the balance sheet now contains both more liabilities (debt to someone who loaned me the money) but also more assets (all the kitchen equipment I bought) and then my challenge is to earn a return on my investment in those assets before they depreciate (i.e., break). But a company that thought it had the opportunity to make a lot of high-value low-cost purchases would never avoid doing so simply because it might involve increasing its outstanding stock of debt.
I think that this viewpoint could be really helpful if applied to the United States government.  There is a lot of potential to invest in infrastructure right now, while prices are low.  Sure, not all infrastructure works out and there is a lot of poor decision making in government process.  But businesses make mistakes too.  The trick is to, on average, make more good decisions than bad.

However, in the long run the stock of public goods (roads, bridges, powerlines, canals, and so forth) have been key to the success of a nation from ancient times.  In the modern world, with the focus on human capital, I think education might have the same status as a good long term investment.  Perhaps this is a case where we should think of government more like a business??


  1. Yes.

    Though it's very difficult for people to wrap their minds around the concept. Part of the problem is the attitude which Mark illuminated in the Block that Metaphor! post. There is an assumption that business is good and the driver of the economy without any reflection on the fact there are plenty of inefficient businesses in the world. Like you stated "But businesses make mistakes too." I would go further by saying that a lot of businesses make a lot of mistakes.

    The talk about the national deficit and debt is troubling because it's so simple-minded. There is a huge difference between good debt and bad debt. Good debt increases opportunity in the future while bad debt doesn't. I'm not suggesting the majority of U.S. government debt is good debt, but to say "we need to shrink the size of government" is a very childlike thing to say.

    The unquestioned run that this country had after World War 2 is over. If we don't consider long term goals and steps to reach those goals and if we don't follow through with those steps, the country is facing a sustained loss. Yes, this is a good time for infrastructure projects, why? Because to be a leader tomorrow, you have to prepare and build today. The United States has an outdated inefficient power grid and even more outdated rail system. Yet no one has the intellect and willpower in Congress to pass improvements which will benefit us for decades in the future.

  2. One of the myriad ironies here is that, even though the analogies between government finances and those of households and businesses are deeply flawed, they still don't support the conclusions of the people drawing them.

    If you have purchases that need to be made (and are costly to defer) and you are offered an interest-free loan, it really doesn't matter whether you need to modernize your electrical grid, update your IT system, or get a new roof -- you borrow the money.