Since we seem to be on a topic in which a poster preaches that other people fail to understand something I will “teach” that person why a business taking on debt and a country taking on debt have significant similarities.
First I will start with a business. A business has a few options when it comes to obtaining assets to start a company. They can incur two forms of liabilities. The first liability is indirect and it is capital. It is basically asking people for money in which you promise to earn those persons a return on their money worthy of their investment. The second form is a direct liability. It is a promise to pay a an amount either to a lender or to a person holding preferred stock.
A government works differently but in many ways extremely similarly. First let’s start with the basics. Annually, a government incurs expenditures and takes in revenues. This is similar to how a company operates, as shown on the company’s income statement. However, the government does not need to start with a capital investment. Just so that a certain insect understands this, this difference is not relevant to government spending.
So we have a government incurring expenses and taking in revenues. Where do revenues come from? The bulk (99.9%) of a country’s revenues come in from the source of taxation. The taxes are paid by the government’s citizens and corporate entities paying taxes. But what about services the government offers? The government sometimes charges fees for services it offers but only to offset the costs of the expenses needed to operate the service requirement. Why don’t they charge far more to bring in more money? Sometimes they do. The problem is that when the government tries to guarantee a profit, the private sector tends to find a better solution and go with that instead. But what about when the government forces the business to pay their fees? This does happen. Unfortunately this is an indirect form of socialism and results in the government agency recklessly spending money when the free market would have a better solution. These arrangements tend to be short term and not a significant source of revenues because the government agency just ends up spending the money or the businesses complain enough to the point where another solution is found. This is a discussion for another time but I am not going to spend much time on this because, it is a red herring. This type of transactions represents less than 1% of the revenues a Federal Government takes in.
So we are back to where does the government obtain their revenues. After taxation, there is another source. Just like a business, a government can obtain money necessary for spending via debt. For the purpose of not trying to confuse people, I am not going to talk about intergovernmental holdings (IGH). IGH is a type of debt, but it is a smoke screen. The revenues came from somewhere else and are just reapplied to a given expenditure. So where does the government incur debt? It asks people or other governments to purchase debt instruments, just like loans. It says, we (government) promise to pay you so much interest in return for some money now. How is this different from debt from a company? It isn’t! Except for the fact that most businesses pay off part of a principle but governments tend to just keep pay interest into infinity.
OK, so if they can keep paying interest into infinity why not just incur more debt? The more debt a government incurs the higher the interest rate it must pay. This is supply and demand and Econ 202. The more you need the more you must pay. This is what makes too much debt a problem.
OK but then a country can just keep raising taxes? It can. Up to a point. You cannot tax more than your citizens actually make. There are a few reasons for this. 1) If you tax more than your people make, they could not actually pay the tax and you are left back at square 1. 2) If your tax rate is unattractive, the people will move elsewhere. Don’t believe me?
http://www.redstate.com/diary/alanjoelny/2014/10/12/even-french-fleeing-high-taxes/http://rt.com/usa/190456-foreign-banks-taxes-americans/3) The third drawback is the Laffer curve. This is another discussion but I will give you a link to read up on the basics. In essence, there becomes a point in which raising taxes decreases revenues.:
http://en.wikipedia.org/wiki/Laffer_curveOK but when a government takes money from its citizens and spends the money, this drives the economy right? False! This is what the Noble Prize winning economist Milton Friedman called the greatest economic fallacy of all time. People buying the goods and services they need drive the economy. The government does not actually produce anything, which is why it does not increase the GDP based on the government’s activity.
https://www.youtube.com/watch?v=Hrg1CArkuNcSo how is a government incurring more debt a problem? How is it similar to a business incurring debt? It is the exact same thing. From the above discussion you can see that a government’s revenues (their resources to pay for things) is finite. When the interest on debt takes a larger and larger share of revenues, the government can either incur more debt at a higher rate (of which we have already established in this scenario that the interest % is taking up too much of the revenues). The government can reduce their spending and cut other programs in order to help prevent the bleeding. Or lastly the government can enter default.
Let’s look at all 3. In scenario 1, if the government is having a hard time paying their interest, taking on more debt is really not an option. The problem is the cost of this new debt would be very high because no one wants to take the unnecessary risk of buying this new debt and not being rewarded. If a government cannot even pay the interest off on the old debt, the new debt is too burdensome.
Scenario 2: The government can reduce their spending? Well we have already seen how hard liberals try to fight this. You take away one program that does nothing and then they start to blame immigration and Ebola on the Republicans. This is really the only viable option. The government has to give less to it’s citizens once it cannot pay the interest or even comes close.
Scenario 3: Default. Default causes all new debt to skyrocket in price. Right now the US pays a low interest rate on their debt. But by 2020 the CBO estimates that interest on debt will be:
“In CBO's most recent projections, which assume that current laws remain the same, annual deficits decline from the $1.3 trillion recorded in 2010, but the cumulative deficit from 2011 through 2020 exceeds $6.2 trillion. Borrowing to finance that deficit--in combination with an expected rise in interest rates--would lead to a fourfold increase in net interest payments over the next 10 years, from $197 billion in 2010 to $778 billion in 2020. As a percentage of GDP, net interest outlays would more than double during that period, rising from 1.4 percent to 3.4 percent.”
http://www.cbo.gov/publication/21960What you might be missing here is what are the current revenues of the country? The current revenues of the US are 2.77T. That means that as a percent of our expenditures the interest alone on debt we owe will skyrocket. This is disastrous.
In conclusion: before trying to make delineation about the differences between government debt and a business debt you really have to understand the components. It is essentially the same thing. Just saying it isn’t, really does not make any claim different.
Final note: please excuse any grammar mistakes. I really did not proof this.