a bankruptcy of ideas

When I’m scouting dead-companies-walking, I look for a number of factors. Businesses fail for all sorts of reasons, after all. But there are almost always two main symptoms of a company in terminal condition: falling revenues and mounting debt. These twin problems feed one another and create a kind of corporate death spiral. As revenues drop, debts rise. Making matters worse, creditors begin to demand higher and higher interest rates to service that debt, which means that repaying it eats up more and more of a company’s shrinking revenues. Pretty soon, that company can’t meet its obligations and its only option is to declare bankruptcy.

I usually find comparisons between government and business strained. But with a government shutdown looming by midnight tonight and the very real possibility that the U.S. Treasury will renege on its credit obligations becoming more likely every day, Washington D.C. is starting to look like the dysfunctional boardroom of a business fast on its way to insolvency.

Everyone, including most of our elected officials, knows that we face a ticking debt bomb in this country. Our nation is roughly $17 trillion in the red, versus an annual economic output (GDP) of about the same amount. I have blogged on this problem before. Put simply, Grandma and Grandpa are killing us. We spend too much on our seniors via Social Security, Medicare, and Medicaid–and the demographic trends say this problem is only going to get worse. The population of people over 65 is set to explode from 45 million today to roughly 79 million by 2038. As this happens, the “dependency ratio” of working age Americans to seniors will fall from 4.4 today to 2.7 in 2038. In other words, our government is going to be spending more on these services while bringing in less in taxes from its working age population.

Lower revenues and higher debt. Sound familiar?

The political dimensions of this crisis might seem complex, but the math of it isn’t. We’re experiencing an unprecedented intergenerational transfer of wealth and we have to decide whether we want to curtail it or fund it with real, instead of borrowed money. As the director of the Congressional Budget Office said earlier this month, “We as a society have a fundamental choice of whether to cut back on these programs or to raise taxes to pay for them. So far, we’ve chosen to do very little of either.”

The last president who engineered a balanced budget was Bill Clinton. He accomplished this feat by following both of the CBO director’s recommendations. He went against his own party and cut spending; at the same time, despite fierce opposition from the other party, he managed to raise taxes, too. Clinton’s successors have done the exact opposite. George W. Bush vastly increased spending and cut taxes. And even though President Obama originally won election by running against everything Bush stood for, we have continued to overspend and under-tax during his administration. The result? That’s right: lower revenues and higher debt. So far, we’ve added a staggering $5 trillion to the liabilities side of the ledger since Obama was inaugurated.

I’ve seen this kind of leadership dysfunction at numerous failing companies. Executives refuse to address major, systemic problems, and they convince themselves that they can stave off disaster with small or short-term fixes. They’re usually the last people to admit just how troubled their businesses are. When the end finally does come, it does so swiftly–and it’s almost always triggered by a shift in the debt markets. Bondholders suddenly stop playing nice, yields soar, prices crash, and a business’s capital structure gets inverted as debts overwhelm its ability to repay them. While it’s true that, up to now, interest levels on government bonds have remained shockingly low, we’re already paying more than $400 billion a year to service our borrowing. That’s almost half a trillion dollars going out the door every year, for which taxpayers receive nothing in return. That relatively “free” ride will not go on forever, either, especially if the hardliners in Congress get their way and prevent the debt ceiling from being raised. Once the dreaded “D” word–“Default”–happens, the gig is officially up.

The scary part of the current impasse is that both parties seem more entrenched than ever. On the one side, you’ve got Republicans threatening to bring down our economy if we don’t cut spending, but they refuse to entertain even the remotest possibility of raising revenues. Meanwhile, on the left, Keynsians like Paul Krugman have actually been calling for the president to borrow even more money. This ideological paralysis also reminds me of many dead-companies-walking I have encountered over the years. Leaders of those doomed concerns clung to their outmoded beliefs, as well–right up until the walls came down around them. 


One thought on “a bankruptcy of ideas

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