Our politicians and mainstream media are still braying about federal deficits, debt, and interest on the debt; I see new headlines every day about it. They are focusing on the money, they are still talking about raw dollars instead of percentages or ratios, they are still implying that any and all federal spending is tantamount to setting the money ablaze, and—as usual—they are predicting doomsday unless we elect (or kick out) so-and-so party or politician. In other words, they are still barking up the wrong tree.
Here’s a chart that shows two things: (1) Interest on the debt is still not heading us towards doomsday—and won’t, as long as the economy and tax receipts keep growing; and (2) spending on national security—intelligence, diplomacy, and military force potential—has been a roller coaster ride. Every time I see this chart it makes me wonder: What if we could have mustered the courage as a nation to keep national security spending on an even keel, and managed it effectively; might we have prevented a war or two?
Click to enlarge.
I'm running out of ways to say this, but I’ll give it another try anyway:
What's important in the government spending debate is not the money, it's what we get for the money. If what we get for the money is worth it, we should do it, even if funding it requires borrowing money from willing lenders. Conversely, if we reject a much-needed project simply because it would require borrowing to help fund it, we are being inexcusably negligent—and guess who will end up paying for that negligence on our part. (Answer: Our kids and grandkids; some of them with their lives, I’m sorry to say.)
This hole in the public debate is highly frustrating to me. In the private sector, the business decision process in a well-managed firm analyzes any major spending proposal as follows:
(1) What benefits would we get for the money: Growth? Cost reduction? Intangible?
(2) Would the benefits more than offset the costs?
(3) If not, then reject the proposal; if so, then commit to it, and finance it one of three ways:
—100% debt; or
—100% equity; or
—a prudent mix of debt and equity. (Most firms choose a mix.)
Steps 1 and 2 are the tough part of the decision process. After that, step 3 is a no-brainer anticlimax, typically assigned to the financial folks (...no offense to them; I happen to be one myself.) It’s a well-developed process, and it works. In the private sector.
Yet, when it comes to government spending debates, our politicians and the mainstream media start at the tail end: step 3, the money. Steps 1 and 2 get downplayed or completely ignored in the public debate. Government spending, and the taxing and borrowing to fund that spending, get all the big headlines. The benefits the spending would generate get near-zero airtime. The tail is wagging the dog.
Shame on us for continuing to let them get away with it.
Here's an example I found just today. It’s an excerpt from an article by Gene Sperling, who was Bill Clinton's economic advisor. He’s focusing, of course, on the money—imagining a scenario quite different from the way things actually turned out...
Imagine, for example, if [Clinton's] administration had left the new Bush administration with expected annual deficits of $450 billion before we had been hit by war or recession.
In that case, the deficit might have soared to more than $1 trillion -- a destabilizing 10 percent of gross domestic product.
But Sperling’s imagination seems one-sided to me, and I strongly suspect partisan politics as one possible motive. In any case, I, too, have an imagination, and guess what: I can imagine another scenario, also quite different from the way things actually turned out...
Imagine, for example, if [Clinton's] administration had left the new Bush administration with a stronger, more effective national security structure. Imagine the Clinton administration having funded that new, more-effective structure with a prudent amount of borrowing, instead of having sacrificed national security on the false political altar of surplus-worship.
If that had been the case:
• the twin towers of the WTC might still be standing today;
• the subsequent $1 trillion financial hit might have been avoided;
• the subsequent wars might not have happened; and
• the resultant war- and recession-driven deficits would have been much, much smaller.
If we had devoted a little less time to surplus-mania in the late ‘90s, and a little more time to the benefits of fulfilling government’s fundamental duty of providing national security, here’s what we might have obtained for the money:
My point, again, is this: What we get for the money is the important question, and it should be the first question. If the benefits surpass the costs, we should do it—even if borrowing would be necessary. It takes courageous leadership to sell the ideas that are right for the long term but difficult to measure in the short term.
And remember: benefits are not always financial. For example, war prevention is a benefit of national security, but how many dollars is a prevented war worth? Don't ask me, I don't know how to place a dollar value on vast numbers of lives. But do you remember the Reagan-years defense buildup? Yeah, that's right: the one that "busted the budget" and "ran up all that debt"? Well, here's what we got for the money—and what I do know is this: It was worth every penny.
When a spending proposal’s benefits surpass its costs, it is a good investment. And borrowing money to finance good investments is sound financial practice. Ask any banker.
