Debt is a sign of progress. It’s a market signal about growing future earnings for families and businesses.
Despite this, politicians continue to argue the opposite. Looking for ways to demagogue the national debt, they lament the inability of our federal government to do as families and businesses routinely do whereby they “balance their budgets.” As Sen. Ron Johnson put it in a recent op-ed, “Unlike the federal government, families and private-sector businesses have to keep spending in line with earnings. To do so, they budget, estimating what their income will be and making sure their planned expenditures don’t exceed it.”
What Johnson asserts isn’t true.
Just Google “personal debt in the United States.” Your computer will explode. Personal debt continues to rise. And far from a negative, rising personal or family debt signals rising personal or family productivity. We know this because no one lends money with an eye on not getting it back. Subsequently Google “compound interest” and “eighth wonder” if you’re confused.
The main thing is that families in no way align expenditures with income simply because they don’t need to. Businesses are no different.
With businesses, debt is the goal. And for obvious reasons. The alternative to debt financing is equity financing; as in giving up a portion of the business in return for cash. Businesses not necessarily expected to survive can generally only attain equity financing, if they’re very lucky. At which point only the established businesses can borrow. Which is no insight. It’s also very telling.
Families and businesses viewed as having bright futures are much more able to borrow. Which is similarly no insight. Those with positive incomings in the present, and much more important, those expected to have even more positive future incomings can borrow with ease exactly because expectations about rising earnings signal an ability to pay monies borrowed back.
Sen. Johnson already knows all of the above as an individual and as a successful businessman. The U.S. is dense with rich families and rich businesses, and a reflection of the previous truth is all the personal and business debt in the U.S.
Which brings us to the federal government. While it has no resources, it has taxable access to the earnings of American individuals, families and businesses that DO have resources. Which is the point, but also the problem.
Any entity that has access to the earnings of the most productive individuals, families and businesses in the world is going to find borrowing easy. Johnson believes the federal government has a “debt” problem, but evidence there’s no debt problem is all the debt. Markets are efficient, but they’re also ruthless. Not just anyone can borrow.
Just the same, it’s a major problem that our federal government can extract so much in the way of private earnings. That it can explains its ability to borrow so much. See above: Families and businesses viewed as having bright futures are much more able to borrow. By extension, governments with taxable access to the earnings of families and businesses viewed as having bright futures can easily borrow.
It's a comment that in lamenting the debt part with governments, Sen. Johnson is lamenting symptoms, not the problem. And the problem with our federal government is that it collects far too much in taxes now, and much worse, it’s expected to collect exponentially more in the future.
Which explains the why behind the debt. We’ll know Johnson is serious about reducing the debt when he calls for tax collections so low that the U.S. Treasury is no longer the best credit risk in the world.
