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Thursday, May 09, 2013

An Impossible Congress

 Wal-Mart Stores, Inc. Net Debt and Debt to Earnings Before Interest, Taxes, Depreciation and Amortization, 1987-present. Source: Bloomberg

Bloomberg has a very good article on government deficits, and it is well worth reading:

Boehner Accidentally Explains Why His Deficit Position Is Phony
By Josh Barro May 8, 2013 11:58 AM ET

Yesterday, in an interview with Bloomberg Television, House Speaker John Boehner warned that the U.S. government must balance its budget. After all, he said:

"We have spent more than what we have brought into this government for 55 of the last 60 years. There’s no business in America that could survive like this. No household in America that could do this. And this government can’t do this."

It’s hard to think of better evidence for the sustainability of budget deficits than the fact that we have run them for 55 of the last 60 years. If our fiscal practices haven’t caught up to us after 60 years, when will they? Or does Boehner take a David Stockman-like position that the last several decades of American advancement have in fact been a ghastly failure?
In effect, Mr. Boehner says that X is impossible, but then we have done X for 55 of 60 years...

So... why is that?
Boehner is right that no household could keep borrowing like that. He’s not quite right about a business though. Look at the accompanying chart. The orange bars show the net debts of Wal-Mart Stores, Inc. They have soared -- up 5,760 percent since 1987. By comparison, the roughly 600 percent rise in the U.S. public debt over the same period looks restrained. Is Wal-Mart mad? How long can it go on just borrowing and borrowing and borrowing?

The answer is “as long as Wal-Mart keeps growing.” The white line shows Wal-Mart’s ratio of debt to earnings before interest, taxes, depreciation and amortization. And what that shows is that Wal-Mart’s debts have been rising to keep pace with its growing earnings. Similarly, for six decades U.S. government debt has been rising roughly in line with the growth of the economy. Over the last few years, it’s grown a lot faster because of cyclical economic weakness. The proper matter for debate is whether recent deficits are too large -- not whether six decades is too long to run them.

Economic decisions by economic dunces.


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