fresh voices from the front lines of change







Originally posted at Capital Gains and Games.

Interesting column in yesterday’s The New York Times by Jesse Eisinger of ProPublica about the budget strategy the U.S. might be following if it were a private equity firm, that is, if it were run as if it were Bain Capital, Mitt Romney’s former employer.

Eisinger’s conclusion: Given the current incredibly low interest rates, the management of a private equity firm would be rushing to borrow more to finance its activities rather than to be repeatedly demanding that it deleverage and do less.

In other words, running the U.S. as a business as Romney says if elected he could/would/will do, would actually get him to do the opposite of what he and others running for president and Congress are insisting needs to be done: They would be increasing the deficit and borrowing more rather than reducing it and shrinking federal activities.

This is hardly the first time someone has suggested that a very low interest rate environment means that the federal government should be borrowing more rather than less. But given the hyper rhetorical Dark Ages state of the current budget debate in Washington when facts and substance take a back seat to pseudo religious economic and finance beliefs, it’s the first time in a while that it’s been talked about prominently in a mainstream publication.

Why isn’t this point getting more (or any) traction?

  1. Today’s federal budget debate is almost a purely emotional rather than a rational discussion and anyone who suggests more rather than less government debt gets the modern-day equivalent of stoning and excommunication. That makes Eisinger’s quantitative explanation of the excellent return taxpayers would get today from more borrowing largely irrelevant even if it’s absolutely true.
  2. Because of the emotions and political implications, no one in a position to champion the argument is willing or able to do so. This includes Romney, a former senior executive from one of the world’s top private equity firms who should (and almost certainly does) know better.
  3. The borrow-more-now strategy is appropriate if it’s used to do the federal government’s equivalent of investing by being spent on things that will provide a future return such as infrastructure, education, and some R&D. But it’s hardly clear that, if it borrowed more, the additional amount would be used like that. Indeed, given today’s politics there’s every reason to believe that the additional borrowed funds would be used for operating expenses, projects that provide immediate gratification, and for investments that will never provide much of a return rather than for capital expenses that provide an actual long-term economic benefit.

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