Yes, believe the hype about the National Debt

Sally Kohn’s recent prose in USA Today was right in spirit, but nowhere else.  Yes, we should worry about innovation.  Yes, the future of the US economy is innovation.  And yes, we should be making strategic investments into innovation.   But it is ludicrous to suggest the national debt discussion is some “ideological attack.”

Kohn inaccurately compares a company’s income to the US economy’s GDP. The analogy fails on the surface. GDP measures national production, not the US government’s revenues – which are the ultimate source of repayment for debts issued. The US government collects net receipts of $2.16T – giving the US government a ratio of over 6-to-1.

Kohn makes the argument that some leading businesses carry higher debt-to-income ratios than the US government and therefore the US government should be allowed to borrower similarly. Kohn’s suggestion that the federal government should be allowed to borrow in “the same way American’s best businesses do” shows her lack of understanding of debt markets. First, it is the investors (the buyers of this debt) who allow these companies to borrow at those ratios – not the company.  Companies can borrow because the buyers of their debt (and equity) allow them to.  When investors lack confidence in companies they in turn require a higher rate of return accomplished by a higher interest rate on the debt.  Or they require other debt covenants.  Today, most of the US debt issues are shorter-term issues because the investor appetite for longer-termed US debt issues has waned.  This is just one sign investors are concerned about national debt levels – investors are showing a preference for debt that will be paid back quickly.

Kohn also fails to understand capital structure.  Capital structure is the balance companies maintain between between debt and equity. Companies tend to have capital structures consistent with their peer groups or industry sectors. The US government has been a great risk so on some levels it truly is in a group by itself.  But at the end of the day, it must compete for dollars from other potential debt instruments – most notably from other sovereign debt. Investors will not always and forever buy US debt blindly.  There are a myriad of other investments competing for these dollars.

Kohn’s argument further breaks down when she suggests the government should borrow to invest.  When the government issues debt someone must buy that debt from them.  These dollars would have gone towards other investments. Borrowing therefore crowds out investment. Kohn implicitly suggests the government can do a better job of investment in innovation than the private sector. The failure of additional investments in education and elsewhere to produce meaningful results suggests this is flatly wrong.

Certainty the US government should be investing in innovation.  This is especially true where market failures might exist or an otherwise lack of investment.  This is perhaps most pronounced with basic research.  Otherwise, the government should seek to lower their debt levels and leave investing in innovation to the markets.