StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

Would A President Romney Increase The U.S. Deficit And Debt?

20 Jan 2012
Posted by Stan Collender

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.


Real rates

At a time when real (inflation adjusted) rates are negative for ten year borrowings, you don't need very much of a return.

In other words, investors are willing to pay the government to hold their money for ten years. Just sitting on the pile of cash, let alone use it for some rational purpose, would earn a positive return.

Compare that to the cost of our current massive unemployment and fraying social safety net.

4. Liberal Media. Oh, sorry.

4. Liberal Media. Oh, sorry. Damn liberal media.

Of course Romney would run

Of course Romney would run large deficits. That has been the pattern of every GOP president since Reagan.

If your party stands for No New Taxes (Read my lips) and there is no stomach for the political suicide of cutting popular social programs or move to cut defense spending or doing away with paybacks to political sponsors, then there will be deficits. As Richard Cheney said, "Deficits don't Matter". He is correct. Deficits don't matter to the majority of voters who want jobs. It is the TParty Republicans and conservative independents that dislike deficits. That is not a governing majority.

The real world does feel the impact of printing money

... manufacturers of consumer goods are I think in general down sizing packaging (my daughter says she likes Junior Mints because it's one of teh few candies that fills up more than 1/2 the box, and I noticed today there are 5 rather than 6 granola bars in a package, which is essentially a price increase), and of course there's teh old trick of simultaneously downsizing the ice cream container (from 2.0 to 1,75 liters a while back) and adding more air. I think we consumers know that whether it;s considered dollar deflation, or inflation, it's real, while wages are stagnant. On the plus side, manufacturing is moving back to the US, which is pretty awesome.

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