The Economic Opportunity Inside a Debt-Ceiling 'Crisis'

"He who tries to borrow ‘money' needs it solely for procuring other economic goods." – Ludwig von Mises

Seemingly lost in an endless tug-of-war between supporters of big and bigger government is that the federal government is not stockpiling dollars when it taxes and borrows away the wealth we produce.  If only that were so.

When politicians take in our dollars they’re in fact expressing a desire to be a size consumer of resources always and everywhere produced in the private sector.  Politicians want the trucks, tractors, computers, desks, chairs, buildings and human labor that dollars can command in the marketplace, and that would otherwise be purchased or hired away by private sector businesses and start-ups. 

When politicians spend they’re expropriating precious resources (physical and human) that, if left alone, would be matched with entrepreneurs and businesses on the way to major growth within existing businesses, along with the creation of countless new ones. In short, when politicians promise to spend they’re actually promising to make it more difficult for private-sector companies to expand, and in the process create work opportunities.  

Probably the best way to contemplate the economy-sapping shame of government spending is to consider Venezuela.  Up front, this is not a column predicting that the U.S. is on the path to rioting in the streets a la Venezuela.  Not at all.  At the same time, it is to say that Venezuela’s economy is collapsing thanks to politicians there having expropriated to themselves the means of production.  U.S. politicians expropriate exponentially more than politicians do in Venezuela, but we don’t notice it as much thanks to the overall size of the U.S. economy. 

When Venezuelan politicians spend, it’s the equivalent of $200 being taken from an individual with $300 to his name.  It’s visible, and it hurts a great deal.  Applied to the U.S., wasteful government spending here is the equivalent of $300 million being taken from someone with a $1 billion net worth.  It still hurts everyone, rich and poor alike, thanks to reduced investment, but the former billionaire still has $700 million to put to work.  The economy-sapping shame of federal spending in the U.S. is hidden by our immense wealth. 

Still, readers would be wise to contemplate just how much better off we’d all be if Washington hadn’t been such a size allocator of our precious wealth over the decades.  The advances we never experienced thanks to experiments never pursued should boggle our minds, and also anger us.  So much progress, so many cures, so many amazing work opportunities never realized, all thanks to Washington’s endless desire to spend the wealth that is always and everywhere created in the private sector. 

Which brings us to the latest discussion of the so-called federal “debt-ceiling.” In an op-ed for the New York Times, USC professor Edward Kleinbard proved the opposite of the school’s brilliant, and rather cool-headed quarterback Sam Darnold.  Kleinbard is the proverbial shaky-footed qb, always terrified by the big bodies rushing around him, and who exits the pocket at first opportunity.  In Kleinbard’s case, his emotion caused him to make hysterical comments about the debt ceiling.  As he put it,

“Sometime in October, the United States is likely to default on its obligation to pay its bills as they come due, having failed to raise the federal debt ceiling.  This will cost the Treasury tens of billions of dollars every year for decades to come in higher interest charges and probably trigger a severe recession.”

Oh dear. 

Back to reality, and assuming what’s unlikely whereby Treasury briefly stops paying its bills, what would be so bad about investors charging Treasury higher rates in order to borrow? Missed by Kleinbard is how higher borrowing rates for the U.S. Treasury would be wonderful for the overall U.S. economy.  That’s true given the basic economic truth that wealth never lays idle.  Congress accessing fewer resources is not the same as those resources sitting unused.  Let’s be serious.

Back once again to reality, investment bankers, venture capitalists and private equity specialists earn enormous sums precisely because access to the economy’s resources is so incredibly difficult to attain.  Much as Washington’s errant politicians don’t sit and stare at stacks of dollars, neither do America’s businesses and start-ups.  Instead, they seek dollars for what they can be exchanged for.  They too are in the market for the trucks, tractors, computers, desks, chairs, buildings and human labor that dollars can command in the marketplace. 

The obvious problem is that when the federal government is aggressively consuming the wealth that the private sector has created, there are tragically fewer resources for America’s businesses (small and large) to bid on.  Kleinbard presumes a recession if Washington can’t borrow at low rates, but simple common sense says that the private sector will thrive if Congress is borrowing and spending less.

Kleinbard might reply that higher borrowing costs for the feds would mean higher credit costs for businesses, but that’s not a serious presumption.  Kleinbard should know this well given his job in a state defined by innovation.  Does he really think that Apple, Facebook and Google would suddenly face nosebleed borrowing costs if California were to default? The very idea is laughable, just as is the one that says America’s businesses will somehow suffer if Treasury is forced to pay higher interest rates.

As for the mere notion of default, Kleinbard needn’t be so naïve.  Goodness, he can follow the dollar’s exchange value as well as anyone else can.  Congress has been running up debt for years, but in many of those years the value of the dollar has declined.  To be clear, we first defaulted in 1933 when FDR devalued the dollar, and then default became the norm after Richard Nixon’s 1971 decision to totally sever the greenback’s link to anything real.  Seemingly missed by Kleinbard is that Treasuries pay out dollar income streams. 

As for the debt-ceiling opportunity, it’s hopefully that U.S. voters wake up to the truth that all government spending, whether taxed away or borrowed, is deficit spending.  Congress is spending our money.  Always.  If the latter can be heard above all the hysteria spewed by academics, politicians and pundits, maybe voters will realize that the answer isn’t so much to increase or shrink the debt-ceiling as it is to shrink federal spending in total, and without regard to debt or surplus. 

It’s the spending, stupid.  Always the spending.