Those who compare government to a business have it all wrong. Business exists for the purpose of “making” money. Sometimes it actually does, sometimes it loses money, but the very definition of business is the spending of money for the intended purpose of making more.
Government does not exist for the purpose of making money. The purpose of government is to provide services. Traditionally, governments provide currency, transportation routes, water and sewer services, civil law and order, and military forces. Governments provide whatever services the sovereign power decrees. In the United States, only seventeen sovereign powers are vested in the Congress, whereas most traditional sovereign power is vested in the States. Most of the services provided by government cannot be provided for a profit, and many businesses that have tried to provide these services have gone bankrupt instead.
Government finance is quite unlike business finance. In business, a group of hopefuls plan to make money, then raise capital, spend what it takes to carry out the plan, and, if they run out of money before they make any profits, go broke. The government, unlike a business, has the power to compel income via the collection of taxes, and thus the ability to be assured of some income no matter what. Businesses operate using existing currency. National governments have the power to create money and declare its value. A bankrupt business goes away, its employees go away, its assets are sold off, and it is gone. A bankrupt government may change its leaders, but still remains the sovereign power in its jurisdiction, and still has the power to tax and the responsibility to provide for the common defense and promote the general welfare. Bankrupt government does not go away, although it may be replaced by another, which may become solvent by the expedient of declaring the debt of the preceding government void.
Businesses and governments both borrow money at interest in order to make payments greater than net cash on hand. Business debt requires collateral, but sovereign debt is backed by the tax base of the borrower country alone. Business creditors can seize property, but creditors holding sovereign debt cannot, nor even sue for payment without government consent. Commercial debt has a credit limit, the maximum amount of credit that the lender will extend to the borrower. Sovereign debt has no formal limit, merely the authority of the government to go borrow as enacted. In a monarchy, the King does not need parliamentary permission to take out new loans. In the United States, the Constitution grants Congress the power to take out loans, but Congress has neither staff nor bureaucrats to do the paperwork, so we have the Treasury telling Congress it needs more money with which to pay enacted disbursements, and Congress telling Treasury to go sell more bonds to raise the cash. This borrowing authorization up to a specified amount is called the “debt ceiling” by the media, a fairly inaccurate label. It limits the authority of the Treasury to sell US bonds, but does not limit the power of Congress to incur debt by enacting spending that revenue does not cover.
When currency is made of precious metal, it has inherent value as a commodity. All ancestral media of exchange had inherent value as commodities, but a government is able to create currency whose value is its word, the coins and paper having only symbolic rather than actual value. It has been the practice for major trading nations to issue fiat currency like this worldwide since about 1850, and there is now too little gold or silver in the world for the US economy to go back to precious coinage at any price. Just to even up the amount of currency with the amount of metal at current prices would require a tremendous devaluation of the currency (i.e., a tremendous price increase for the commodity.) The value of fiat currency is not tied to commodities at all, but is tied to the word of the issuing sovereignty – if a government with fiat currency and bonds goes back on its word, its currency loses value and its credit costs go up.
When a nation issues sovereign debt, the only value it has is the expectation of future solvency of that nation, with tax revenues to pay off with. As a nation approaches insolvency, buyers sell its debt in trade for that of more solvent or wealthier nations. The distance from insolvency of a nation can be measured in part, by the demand for its debt outside its own borders. The nation least likely to go broke soon is the one whose debt is most widely held, whose currency is the standard in world trade. Since 1945, world trade has been conducted in US dollars, and demand for US sovereign debt is still higher than that for any other nation. As long as the United States keeps its financial word, US dollars and US bonds will be considered “as good as gold”, even though their value is entirely promissory.
As of this writing, the United States is in the 27th month of slow recovery from a multi-trillion dollar capital crash in the fall of 2008 (full recovery from capital crashes takes three to four years.) Unemployment is at historically high but not unprecedented levels. Revenues, based on taxable incomes, are the lowest as a proportion of GDP since the 1950s, while spending exceeds revenues by 44 cents of every dollar spent. The Congress more than doubled the national debt during the W Bush Administration, lowering taxes at the top while increasing both budgeted and off-budget spending, including two hugely expensive Asian wars funded as “supplementary” spending, together exceeding the amount of entire budget itself, which was in deficit even without them. The capital crash blew away over a trillion dollars in book value, capping eight years of declining employment with a burst of even greater unemployment. It is not good to have to borrow another two trillion dollars just to keep the economy barely afloat for two more years, but that is the present circumstance.
John Maynard Keynes proved that national economies, unlike businesses or households, do not actually have to break even, as long as their credit lasts. He showed that spending was the basis for modern western economies, that both government and private sectors stimulate the economy by spending, and that government spending on sovereign credit can keep GDP up during a collapse in private spending. While business is advised to follow the business cycle, expanding during a boom and contracting during a bust, government cannot do the same and meet its obligation to promote the general welfare. Keynes theory has been demonstrated to be correct – if the government grows during busts and shrinks during booms, opposite to business, the general welfare can be sustained while sovereign credit is sustained too. If government contracts when business and households contract, the economy enters a deflationary spiral and a depression ensues. The government must raise taxes during good times to retire the debt incurred during bad times, the opposite of sound business management. It works because the government is not, after all, a business, nor enough alike to one to be run as if it were. Keynes called this phenomenon the “paradox of thrift”, because the same thrift that businesses practice to their benefit during an economic slump is disastrous for the economy as a whole when practiced by the government. Counter-intuitively, unlike a business, a government actually can spend the economy into recovery on borrowed money!
The next time you hear someone say that the government has to operate more like a business or a household, tell them that they do not know what they are talking about. They don’t.
