Thursday, January 15, 2009

Do We Have an Upside-Down Government?

With all the talk of businesses and individuals not covering their debt, it got me thinking, does our government even have the assets to cover its debt? When a business buys a building it can usually borrow the full price of the building. If it goes under it can always pay back the loan with the resale of the building. Like a business, our government owns a lot of capital: highways, roads, bridges, government buildings, parks, etc. Like a business our government has debt: currently over 10 1/2 trillion dollars. Now that's big, but how big depends on your measurement. Here is a chart that puts it in perspective:

As you can see, our debt is increasing at an increasing rate. But the second graph shows that our debt as a percentage of what we produce is actually much lower than the days of the New Deal. But what exactly does that mean? I wasn't totally sure myself, so I decided to ask someone smarter than me. I sent an email to the economists over at Marginal Revolution to see what they thought. They were kind enough to respond to my question: "Does our government have the assets to cover its debt?"
Tyler Cowen: I say yes, but raising taxes makes us poorer...
Although I appreciate Tyler's short and sweet answer, I feel like Alex hits the nail on the head:
Alex Tabarrok: The government has the power to tax - so its ultimate asset is the wallets of the American people. In that sense, yes the government has enough to pay off our future debt.
So our government can pay its debt (which is why people around the world still invest in US government bonds). That said, total debt and debt % has been on the increase since the 1980's. The graph above shows that a large portion of that debt is non-government. In fact, household debt percentage of GDP has doubled since 1980 (from 50% to 100%). Also, the financial sector has increased their debt from 21% of GDP in 1980 to 116% in 2007 (this helps explain its recent vulnerability). So what is the solution to the current economic problem? On this one, Tyler Cowen gets it perfect:
Tyler Cowen: Spend less, save more, be poorer for a while.


  1. The govts of all nations are upside down :)

  2. Not sure how I missed this comment. I wonder what you mean by this Roger? That is if you're still there.


You are the reason why I do not write privately. I would love to hear your thoughts, whether you agree or not.