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??

Prediction is hard

President George W. Bush in 2001:

Many of you have talked about the need to pay down our national debt. I listened, and I agree. We owe it to our children and our grandchildren to act now, and I hope you will join me to pay down $2 trillion in debt during the next 10 years. At the end of those 10 years, we will have paid down all the debt that is available to retire. That is more debt repaid more quickly than has ever been repaid by any nation at any time in history.

I think that the core issue here, presuming good faith on all sides, is that second order effects are really hard to model. So tax cuts (both business and individual cuts) are seen to stimulate the economy. But accurately predicting that is very hard in a large and non-linear system like the United States economy. It's even possible that tax cuts could have perverse effects of lowering growth (I am not saying that they do -- it's just that complex, non-linear systems which are sensitive to initial values are very hard to predict).

So perhaps the real lesson here is to focus on first order effects. Link tax cuts directly to program cuts. And vice versa, new programs should have taxes that are linked to them. In my world, that would include wars (notice how World Wars I and II led to large tax increases to finance) which would make the debate about military intervention a lot more involved. I don't know if this would be a complete solution to deficit woes, but I worry that the current approach relies way too heavily on statistical models to predict the consequences of tax and budget policy (and, as we know from chaos theory, these types of models are notoriously difficult to use for prediction).

Deficits

This is a point that I have also argued and it bears repeating:

Once we understand that there’s no way that one Congress can hold a future Congress to a deficit deal, the discussion can stop right there. The last time there was a surplus, Republicans literally argued that the disappearance of the national debt was a problem that needed to be solved by massive upper-class tax cuts. There’s no reason to think it wouldn’t happen again

I would find the current discussion a lot more comforting if the early George W. Bush years had not begun with an argument that a balanced budget was a serious problem. I'd at least be more sympathetic to the current discussion if it began with a lot of "we were completely misguided . . . " retractions of past policy.