Flush in Debt - by Zachary A. Goldfarb

How a Flush Country Could Be in Debt Trouble
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By Zachary A. Goldfarb

The United States isn’t broke. The government collects $2 trillion in tax revenue a year and has been able to borrow even more at very low interest rates.

Beyond government, U.S. companies led by giants such as Apple and General Electric have saved nearly $2 trillion at home and $1 trillion more overseas. U.S. banks have up to $2 trillion available to lend.

GOP leaders try to rally votes in the House as Republicans and Democrats in Congress pursue separate plans to avert a government default in a messy legislative showdown.

Yet the U.S. government confronts a debt crisis, and fears are mounting about a possible default. How could this be?

The answer comes down to politics and math.

While the U.S. government’s $14.3 trillion debt is an eye-popping figure, the country has plenty of resources. It’s just that over many years Americans and their leaders have chosen not to tap them to pay the government’s growing bills.

So the United States could be deemed an international deadbeat for a debt load that it has the financial wherewithal to pay off.

Consider the government’s debt. Almost half, or $6 trillion, is money the government doesn’t owe anyone but itself, for instance to the Federal Reserve or Social Security. An additional $3.9 trillion is owed to U.S. investors, investment funds and companies.

So what does the government owe to the rest of the world?

It’s about $4.4 trillion. But when the government, U.S. businesses and individuals are taken together, the country as a whole owes the rest of the world only a far more modest $2.5 trillion on balance. That’s because of the trillions of dollars that Americans have invested abroad in foreign companies, gold and other assets, offsetting much of the debt.

As a share of the country’s total wealth — or of what Americans produce every year — the country’s debt to the world is small. And it has remained fairly constant over the past decade.

The United States is a lot like a rich businessman who owns two homes, a yacht and millions of dollars in stock but is in debt because he took out a big loan to buy a private plane.

This fellow could always have used some of his wealth, for instance his stock, to pay cash for the plane. But he didn’t want to. Now, with the weak economy, he’s finding it hard to pay off the plane simply out of his salary. By putting most of his wealth beyond reach, he has boxed himself in.

Likewise, U.S. politicians have made a value judgment that they shouldn’t tap much of the country’s wealth to pay for government programs. That judgment, in turn, reflects the preference that many Americans themselves have expressed over the years for leaving private resources in mostly private hands.

Political leaders have actually reduced taxes — personal and corporate — to some of their lowest levels in generations and carved out a series of loopholes and policies that allow American companies and individuals to save money. And some of this money ends up leaving the country altogether.

The government, for instance, has encouraged savings in tax-shielded retirement accounts, which in part are invested abroad.

Corporations, likewise, have enjoyed preferential tax treatment through a range of loopholes and breaks that allow many large U.S. companies to pay far below the 35 percent corporate tax rate. Again, some of these corporate savings end up invested overseas.

Money generated by companies abroad isn’t taxed until it is returned to the United States — which companies are loath to do.

Frank Warnock, a professor at the Darden School of Business at the University of Virginia, said the government decided to make major expenditures — such as two wars — without coming up with the money to pay for them.

But while the country is flush with assets, it doesn’t mean the government can seize them to pay for public debt. “I don’t think you can say there are buckets of money and let’s grab it,” Warnock said.

The United States finds itself in a very different situation from Greece, Portugal and other European countries that are struggling with debt and trying to avoid default. These Europeans have far less wiggle room, owing the vast majority of their debts abroad while owning relatively few assets.

What’s more, these countries have poorer prospects for economic growth. They are being charged interest rates to borrow money that one might expect at a payday lender. And they are locked into a single currency — the euro — which deprives them of a crucial tool: devaluing your currency to make your products cheaper and more attractive to customers in other countries.

The U.S. economic picture is not that rosy either. But economists still expect growth to pick up over the coming years, which will boost tax revenue and make it easier for the nation to afford its obligations. U.S. companies remain competitive, and if firms put their cash to work, it could fuel growth even more.

And if politicians could come to an agreement over government finances, most economists say the U.S. government could bring its debt to heel.
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Zachary A. Goldfarb
Washington Post / Business (July 29, 2011)