Dear Congress: “expense” is not “investment”, and that’s OK

When proposing his budget in the Joint Session of Congress, President Obama used the words “invest” or “investment” 11 times – to support energy research, healthcare and education.  Since then, “investment” is the new budgetary buzzword.  Every government proposal is an “investment”.  Are they really?

Investment is when capital is committed with the intent of getting more capital back.  And when is an “investment” really just an “expense”? When it doesn’t pay back.

There are clear investments, like a toll road that will collect money to pay for itself and then some over time.

There are questionable investments, like a toll road that will collect money that WON’T pay for itself over time.

There are long-term investments, like education, healthcare, and energy, that eventually lead to better citizens, jobs, and more tax dollars.  It is difficult to calculate the return on these investments in both dollars and timing, but one could build an excel spreadsheet that would argue for a positive return, eventually, to the US Treasury.  Plus, they  have a clear “social benefit”:  they make our citizens happier and better off.

Then there are things that we call investments that are really only expenses and social benefits.  Like rebuilding levees in New Orleans.  This is absolutely necessary, and can avoid costs down the road.  But this is an expense, with a social benefit of the well-being of a city.  It will not generate a positive financial return on investment for the Federal government.

Likewise Social Security, which is designed to provide a more comfortable life for our senior citizens.  It is a noble and proper decision we’ve made to provide benefit for our elders.  But to be clear, it is an expense.  The federal government will not see that money multiplied and returned.

When I mention this, people want to argue.  Because the word “investment” is so much more palatable than “expense”.

Expense isn’t a bad word.  It’s OK to spend money.  Cultures and economies decide where to spend their resources.  It’s the fruits of success.  Sometimes it’s on noble ideals and just causes like New Orleans levees and Social Security.

Sometimes we re-invest the fruits of our success – on capital goods and people that will generate more resources for the government in the future, refilling the coffers.  Let’s keep the two separate, lest we begin to believe our fiscal coffers will be re-filled with difficult to spend social benefits like happiness and joy.

Toxic home loans better than Federal debt ratios

You know those evil lenders that gave all those toxic home loans?  You know the ones, they gave consumers debt that they couldn’t pay.  Well, it turns out that the ratios that they use to approve loans are MORE STRICT than what the federal government uses on itself when increasing the debt.  That’s because the “debt to income ratios” of home loans are WAY lower than those of the federal government.

Our government uses it’s own methods of deciding how much debt is too much for itself.  Oft quoted is the size of the Federal debt as a percent of GDP.  They do that because otherwise things look so bad.  Here’s the difference:

And here’s the problem.  The ratio, at 60%, mixes the debt of the federal government with the income of the entire economy.  So, we need to think of this differently.  If we think of the federal debt as a percent of federal receipts, it’s not 60%, as shown in this chart, but more like 400%.  Yes, our $2.38 Trillion in federal receipts is going to take a long, long time to pay down $10 trillion (and climbing) in debt.

If you still think % of GDP is a good way to look at it, then you need to include all the debt that is part of the GDP, not just the debt of the federal government.  For that I visited one of many sites, which gave me the total debt of $57 trillion.  This includes not just federal debt, but also “state & local governments, international, and private debt, incl. household, business and financial sector, including federal debt to trust funds”.  That’s the total debt needed to generate the GDP of about $14.2 trillion.  It’s the right number to compare to the GDP.  So we  end up with about 500% debt to income ratio.

Now, on to the reckless lenders of home loans.  They got in trouble because they issued risky home loans.  A risky home loan is one where the debt to income ratio is above around 300%.

400% ratio for the federal debt, 300% ratio for toxic home loans.  Is a federal debt crisis around the corner just like the home loan crisis was five years ago?  The home loan crisis nearly killed the economy, what will a federal debt crisis do?