Record 'Deficits' Are Logically An Effect of Record Tax Revenues
Washington State University’s athletics department currently has a budget deficit of $67 million. Cal-Berkeley’s department is similarly in serious debt, as are those of many other Power Five institutions.
Where it might get interesting is that the debt faced by the schools is not an effect of declining revenues. The truth is that the heavy borrowing engaged in by them is occurring amid a record dollar inflow. As USA Today reported last week, athletic departments at Power Five conference schools are making “more money than ever.” That they are paradoxically explains why their deficits are so high.
All of this rates mention given the ongoing back and forth about levels of taxation between Republicans and Democrats. Republicans want to reduce tax rates, while Democrats want to increase them. Scolds on both sides view any kind of legislative action that purportedly leads to lower federal revenues as “irresponsible” for the resulting deficits existing as a cruel burden foisted on our “children and grandchildren.” The scolds are confused, but not for reasons readers might think.
To understand why, readers might consider which individuals can borrow, along with the companies and countries that can. Better yet, they might stop and consider who and what can run up nominally large amounts of debt. What they’ll find is that it’s the people, corporations and countries experiencing the most substantial cash inflows that can borrow the most. Crucial here is that the previous assertion is a tautology.
Seemingly lost in all the self-righteous talk about budget deficits is that just as economies are merely collections of individuals, so are lenders individuals. Debt securities exist simply because there are individuals willing to delay near-term consumption in favor of shifting it over to a person, company or country. Those who delay their consumption are doing so in return for future income streams that pay back funds loaned plus interest. Stating the obvious about these savers, along with those who loan their money for them is that they’re not lending it with an eye on not being paid back.
All of the above speaks to the awe-inspiring absurdity of the talk that surrounded debt defaults in 2008. It was said then that some lenders had offered credit to borrowers in “predatory” fashion. Oh sure, savers and those who loan out those savings were actively looking for ways to not be paid back and not achieve market-beating returns….
Back to reality, individuals and those who lend for individuals are always and everywhere doing so because they expect to get back what they loaned, plus interest. As for "subprime" borrowers, the riskier the borrower, the higher the rate of interest charged. Translated, lenders are compensated for lower levels of borrower creditworthiness through larger income streams paid in return for monies borrowed. That this needs to be said is sad on its own, but it serves a bigger purpose. It’s a reminder that borrowers can generally only borrow in size fashion at low rates insofar as they can show to lenders credible past, present and future income streams.
Applied to Washington State, Cal, and other prominent universities eager to be players in collegiate sports, it’s only natural that they would run up major debt amid record revenues. The revenues are the lure for lenders. If revenues weren’t increasing in record fashion, the number of lenders willing to loan to universities would be much smaller. So would the deficits be. If this is doubted, readers need only consider how easy it would be for Apple CEO Tim Cook to borrow, or for Apple itself to. Apple has borrowed over the years at record levels precisely because its past, present and future cash position is viewed so positively by the investors who populate deb markets. Cook could borrow at gargantuan levels for the same reasons. His earnings are seen as credible to those in the business of lending.
All of this ideally helps explain why certain countries can borrow so much. They can simply because income streams “secured” by productive people are easy to sell to investors. That they are explains why the biggest borrowing countries are generally the richest. The debt being paid back is seen as a sure thing. So while the deficits logically don’t increase economic growth, prosperous countries like the U.S., Japan and China can borrow with ease. Poor countries like Haiti, Peru and Zimbabwe cannot. Rich countries can borrow. Poor ones cannot. Markets discipline people, companies and countries too.
It’s all a reminder of how incorrect the deficit scolds are, and this is true regardless of political affiliation. For one, budget deficits don’t burden the “children and grandchildren.” What burdens the youth and their offspring is government spending itself for it signaling the mis-allocation of precious resources. Debt is accounting, while the spending is the problem. The “burden” is the inheritance of commerce that is much less evolved thanks to diseases not cured, technologies not discovered, and luxuries not enjoyed.
After that, the scolds laughably claim anything that limits the inflow of dollars into the U.S. Treasury is “irresponsible.” In truth, actions that limit federal revenues exist as a signal that someone, somewhere understands simple bond math. That which takes in copious sums of money can borrow copious sums. The “deficits” are an effect of revenue growth, not a sign of Treasury not collecting enough.
Which brings us to a choice: federal revenues can decline either thanks to tax rates that are too low, or rates that are too high. The Laffer Curve is real. Since it’s real, it would be nice if Republicans and Democrats would start fighting over which Party will do the most to limit the inflow of dollars, as opposed to increase it.
If we massively shrink federal revenues, so will we limit the accounting abstraction that is deficits. In doing so, we’ll thankfully silence the insufferable deficit scolds. A worthy endeavor indeed.