Should Countries Borrow?

We all know too well that countries borrow, but should they? To answer this question requires knowing why different sectors borrow. It is not solely to have more money to spend. In the case of government it is to provide services that their citizenry want. In this regard, the government sector differs from the business sector in one significant way. The business sector borrows to make a profit. The government sector does not make a profit. The motivation in the government sector is to meet a request from their citizenry. Governments react like harried parent in a Toy 'r Us at Christmas time. Governments do not evaluate whether they can afford the gift, they just make the purchase and look for a lender to support their extravagance.

The profit factor is key in answering the question of whether governments should borrow. A profit provides the monetary resources to repay a loan. Since a government does make a profit they should not borrow. A government will not have the resources to repay the loan.

I can hear you stammering, but, but .... The fact of the matter is Governments are different from businesses. Borrowing is the vehicle that drives business. Business borrows, because it is just another way to increase their profits and acquire more wealth. Borrowing is central to business activity and one of the primary ways wealth is created in a society. It is not something that should be used by the government sector.

I can hear you arguing that government borrowing is older than business. Originally, government borrowing was for waging wars and capturing territory. This activity (tribute or tax revenue) is the equivalent of profit in the business sector. When a government undertook this risky activity borrowing made sense, because the hope was funds would be generated to repay the lenders. But in the modern world governments rarely seek additional territory to replenish their Treasuries.

Most borrowing by the government sector is for providing things for their citizenry: clean water, roads, good schools, social services, health care, etc. None of these activities when managed by unrestrained government bureaucracies provide a revenue stream sufficient to repay the cost of borrowing. Consequently, they should not be undertaken by the government sector.

You are starting to see the light. Yes, all these activities can be managed by the business sector. Business management is efficient and controlled by market factors that ensure a profit and an ability to repay the loans.

Why do governments undertake to provide all these services? It is simply to ensure their citizens provide tribute or taxes.

Government protects its Own

Yesterday, I was listening to NPR (National Public Radio). There was a profile of Marine Pilots. The men and women that guide huge merchant ships into port. There is no doubt that this is a difficult job, but the pay should be comparable to other similar jobs. That only seems fair. These positions are almost always government jobs in the United States since the ports of America are the usually public facilities. Even so I was shocked when the narrator disclosed that pilots in Los Angeles earned in the mid $300,000 and a study of northeastern U. S. pilots had an average salary slightly above $400,000.

I have had positions of great responsibility and critical to the welfare of a portion of the country, but never earned that much money. Of course, I worked in the business sector where salaries levels are negotiated between two parties with "skin in the game." Clearly, most government sector jobs only have one party with skin in the game. There is no real negotiation in the government sector. The emphasis seems to be on making the employee happy.

This incident sparked me to recall an incident in San Francisco when on a trip with my family in the 1960s. The whole family was on a tour bus that made various stops around the city. At one of those stops the bus driver was outside the bus talking to a passenger about a possible upcoming strike by City bus drivers. I was standing with my Father nearby and we could hear the conversation. He was telling the visitor that the average salary for bus drivers was $60,000. I knew the average salary of the business people in our community south of Seattle was about $30,000. The visitor said that seemed like a lot of money. The bus driver interrupted him and explained it was very expensive to live in San Francisco. I pondered that thought since I had looked at a number of S. F. restaurant menus, purchased souvenirs and watched my Father purchase tickets to attractions. They had all seemed similar to Seattle prices. As we walked away my Father, a physician, leaned over and said his salary was about the same as the bus driver.

Later in the afternoon I listened to another NPR show about a "technology cluster school" in Greece.  The school Director stated at one point this school was needed since it was no longer possible in Greece to take your degree and get a government job. Herein lies the problem. The way to wealth in Greece up until the current financial crisis was to get a government job and live happily ever after.

In the United States I believe the average salary today is about $45,000. If you have a federal government employee making $400,000 and each private citizen pays federal taxes of $2,500 it takes 160 people to pay the public sector employee his salary. This does not seems so bad until you realize that if you calculate the cost of all government sector employees. Government sector employees are about 40% of the population and these employees earn much more than their business sector counterparts. Therein lies an impossible situation. The governments only choice is to borrow.

This inequality between the government sector and the private sector has effectively bankrupted Greece and is threatening to do the same to the United States in the next couple of years. A small business sector supporting an overblown government sector will never work. All activities of the government sector are funded from tax revenues from the business sector. I explain this in greater detail in my new book, the Rule of Money.