USA Inc. – what a lie

I am flying today so do not have that much time. But I thought I might share with you a rough rule of thumb I use when it comes to PDF reports that I read. The rule: the larger the file (scaled to page numbers) the worse the report. A large file size (in mbs) usually indicates lots of colour and fancy graphics and usually very little substance. I am sometimes wrong when I apply that rule of thumb but not often. My rule of thumb served me well when I read this report – USA Inc – published by from some self-styled “brains trust”. I have received many E-mails asking me to analyse this Report. I read it and I wish I hadn’t. It was an appalling misuse of time. But moreover it perpetuates the standard conservative lies about the capacity of the US government (and any sovereign government by implication) to pursue appropriate fiscal policy. It gives more fuel to the austerity proponents. So someone has to provide some counter to the the narrative being presented. So here it is … USA Inc – what a lie.

USA Inc. was produced by a company KPCB who have the motto “In search of the next big idea”. I would give up looking if I was them and go back to elementary school and learn some basics before they strut the public stage with their misinformation.

The specific report was prepared by one KPCB’s partners who was a “former financial analyst at Morgan Stanley”. That should tell you something. Morgan Stanley received around $US2 trillion in the so-called backdoor public bailouts in 2007 which were only revealed when Senator Bernie Sanders’ (VT) pushed an amendment to the Wall Street Reform Bill which forced the Federal Reserve to reveal the names of companies that they provided funds to.

They say the Report is “non-partisan” but in reality it is not at all non-partisan because it is driven by the neo-liberal ideology and uses the erroneous government budget constraint framework that defines orthodox mainstream macroeconomics. There is no critical discussion at all in the Report. By construction it is highly partisan in nature.

The Report aims to look:

… at the federal government as if it were a business, with the goal of informing the debate about our nation’s financial situation and outlook. In it, we examine USA Inc.’s income statement and balance sheet …

In a similar vein, the forward is written by George P. Shultz, Paul Volcker, Michael Bloomberg, Richard Ravitch and John Doerr none of which has published anything coherent on macroeconomics.

They claim that the Report describes:

… America’s problems in an imaginative way that should allow anyone to grasp them both intellectually and emotionally. By imagining the federal government as a company, they provide a simple framework for understanding our current situation. They show how deficits are piling up on our income statement as spending outstrips income and how our liabilities far exceed nominal assets on our balance sheet. USA Inc. also considers additional assets – hard to value physical assets and our intangible wealth – our creativity and energy and our tradition of an open, competitive society …

And at that point you realise the whole venture – all 482 glossy pages of it – is a total waste of time. The most informative pages for example include Pages 451 and 452 which carry the text “This page is intentionally left blank” on each.

The US federal government bears no comparison with a private company so the “imaginative way” is pure fantasy and will mislead any readers who are seduced into believing otherwise.

The “simple framework” will not provide the slightest insights into the “current situation” in the US. It will distort the situation by denying the uniqueness of the sovereign government’s choice set. The choice set (which takes into account opportunities and constraints) of the sovereign government is not available to a private entity.

The former is never revenue constrained because it is the monopoly issuer of the currency whereas the latter is always revenue constrained. Their worlds are very different.

We are asked to:

Imagine for a moment that the United States government is a public corporation. Imagine that its management structure, fiscal performance, and budget are all up for review. Now imagine that you’re a shareholder in USA Inc. How do you feel about your investment?

Why would I ever want to imagine something so ridiculous. Why do these people think it is useful to create a construction that is patently false from the inception? The only way you would spend time on this “thought process” as if it might lead to useful insights would be because you didn’t understand basic macroeconomics and the way the monetary system operates in the first place.

In which case, you should not be pumping this stuff out into the public in an attempt to influence public debate. Charlatans ignore their incompetence and proceed to be the expert nonetheless.

A public corporation has to meet a budget to fulfill its spending plans (whether they be for investment or daily working capital needs). They cover the outlays from earnings, borrowing and/or by use of retained earnings. Sometimes they might engage in an asset sale program to revitalise or restructure their company.

The idea of a national government have to “meet” a budget is inapplicable. The government’s budget is special in that it is the product of discretionary decisions made by government (some of which might be codified – these are what the US call non-discretionary entitlements) and cyclical events

Such a government might try to meet a budget target by altering the discretionary components on the spending and revenue sides but ultimately the final outcome depends on private and external sector spending balances, which are not directly controlled by government (although they can be influenced by policy).

This is one of the ironies of the austerity programs. It is highly likely that a nation pursuing fiscal austerity with the aim of reducing their budget deficit will actually worsen it because of the cyclical impacts – the discretionary cuts stifle aggregate demand (spending) which causes economic activity to slow and tax revenue and welfare outlays to rise (as unemployment rises).

It is often the case the the automatic stabiliser component (pushing the deficit up in a declining growth economy) outweighs the discretionary cutbacks (pushing the deficit down but slowing economic growth) with the net effect that the deficit increases. Just look at Ireland as an example.

But as noted before a national government can always spend in its own currency (as long as there are real goods and services available for sale) independent of its revenue side. It doesn’t have to tax, borrow, run down assets to spend.

That is, it is nothing like a corporation.

The other strange part of this analogy is that if a private corporation makes a profit it usually means it is adding value to its shareholders. If a sovereign government runs a surplus it usually means that it is not providing as many public goods as it might should it run a deficit. Given that a surplus also reduces our private purchasing power the net effect is to undermining our welfare.

Further, profits for a company provide it with the capacity to retain earnings which can be used for future capacity building independent of the conditions of the market for loans – thus giving the firm more discretion in its investment decision-making.

For a national government a surplus provides it no enhanced capacity to build infrastructure or fund other essential spending plans. The reason clearly is that as a sovereign government is intrinsically free of revenue constraints its previous budget balance is not a restriction or advantage in framing current (or future) spending decisions.

The only way that past budget positions carry over in time is via their impact on the real economy – so that a sequence of budget surpluses is usually (depending on the external position) associated with declining growth (via the fiscal drag). In that context, future deficits have to be larger than otherwise because there is more real capacity to absorb. The same argument could be made in the context of past deficits which have stimulated growth and allowed available capacity to be more fully utilised. Then there is less need (and room) for non-inflationary deficits in the current period.

But these real constraints or factors are not the sort of constraints the mainstream macroecnomists try to tell us restrict fiscal choices.

The misinformation in the USA Inc Report gets worse as you read it. I will highlight a few of the glaring errors in logic found in the Report because they are consistently used in the public debate by conservatives to attack government involvement in the economy (unless of course one of them is getting a bailout/handout/kickback).

Consider this as a classic example of misconstruction:

… USA Inc … cash flow is deep in the red (by almost $1.3 trillion last year, or -$11,000 per household), and USA Inc.’s net worth is negative and deteriorating. That net worth figure includes the present value of unfunded entitlement liabilities but not hard-to-value assets such as natural resources, the power to tax or mint currency, or what Treasury calls “heritage” or “stewardship assets” like national parks. Nevertheless, the trends are clear, and critical warning signs are evident in nearly every data point we examine.

Can you believe that someone would seriously write that sort of stuff and think they are actually being smart and informative and serving a public purpose?

You get the same sort of misrepresentation from the debt clocks that conservatives love to look at and feel both scared but vindicated. Poor darlings.

When I just consulted the US debt clock it told me that every citizen currently owes $US45,780. That is a plain lie.

No US citizen is liable for the public debt issued by the US government. Go and find a house in your street and knock on the door and ask the residents to produce the contractual documents which say that each resident including all new born children that might be located there owe the US government $US45,780 (and rising).

The mainstream economists claim this is a useful way of thinking because ultimately the government pays back the debt by raising taxes. This is why the debt clock also lists a per taxpayer debt (of $US128,257 and rising). So you might want to restrict your house by house search for relevant contractual documents to the taxpayers that live there.

Either way you will be disappointed.

The US government actually rarely “pays off” its debt anyway although it is paying it off continuously! If you are confused you might like to read my recent blog – Government deficits are the norm – for more discussion on this point.

The US fulfills it obligations on maturing debt by crediting bank accounts in the same way it conducts all its spending. But it usually maintains a growing nominal level of outstanding debt in line with the growth of the economy.

In mainstream macroeconomic texts (and the courses that are based on them) students learn multi-period examples of governments going into debt then having to run a sequence of primary budget surpluses to pay it off. Everything is sweet after about 5 periods but the lessons are very clear – never go into debt because they force up tax rates and they destroy private incentive. And … if that wasn’t bad enough – the debt caused interest rates to rise choking off productive private investment.

All in the land of fairies. By the way, the 3-5 period models are usually because that is the size of the graph that will fit on a PowerPoint slide or on a textbook page. The bar charts below and above the zero line over time usually have nice colours though.

Conclusion: brainwashing propaganda not remotely about the real monetary system.

As an aside, the debt clock site claims it is not associated with any political parties, lobby groups etc but is still secretive about who owns the domain. You can access the registration record via WhoIS and it gives us the following information:

Registrant Name:Registration Private
Registrant Organization:Domains by Proxy, Inc.
Registrant Street2:15111 N. Hayden Rd., Ste 160, PMB 353
Registrant City:Scottsdale
Registrant State/Province:Arizona

Further, I just repeat my often made point that using terminology such as “deteriorating” budget outcomes makes no sense. What is the benchmark? The budget outcome is uninteresting. You have to be concerned about deteriorations in the real economy or the inflation rate but not the direction of the budget balance.

As noted often – if a budget deficit is rising but that delivers full employment and increased prosperity via the extra spending and activity is that a deterioration? You quickly see the point.

Finally, consider the idea expressed in the quotation above that the “power to … mint currency” is a “hard-to-value asset”. The monopoly power to issue currency at will is intrinsic to a fiat monetary system and provides any government in that position with opportunities not enjoyed by any other economic entity.

Such a “power” is hardly an asset to be compared with liabilities. It makes the liabilities relatively uninteresting. It means all liabilities, while legally binding, are easily met. It means that spending is not revenue constrained. It means the balance sheet/profit and loss statement approach of US Inc. is mindless.

Then we meet the ageing population part of the saga:

Underfunded entitlements are among the most severe financial burdens USA Inc. faces. And because some of the most underfunded programs are intended to help the nation’s poorest, the electorate must understand the full dimensions of the challenges.

What a devious way of presenting the argument. We don’t want to hurt the poor so we have to be mindful.

The claim that there are “underfunded entitlements” that will present “severe financial burdens” to the US government is a total lie.

Even if outlays increase for health and pensions as a result of an ageing population the US government is not squeezed for future discretionary spending. To suggest that US government has to make “financial” trade-offs is a lie. All trade-offs when there are underutilised resources are political.

The concept of PAYGO or funding these entitlements is nonsensical to a government that can spend when it chooses.

The US government can and will always be able to purchase anything that is available for sale in US dollars and can always pay their pension obligations as well as purchase other things that are available for sale.

The only issue will be whether there are real resources available to be purchased. But that is not a consequence of any financial constraint.

Running a deficit now does not diminish the capacity of a sovereign government to run a deficit next period or the period after next. If the economy reaches full capacity and non-discretionary government spending pushes the economy beyond the inflation barrier (that is, pushes demand (spending) beyond the capacity of the firms to respond in real terms (increase output) then political choices have to be made. There are no financial constraints involved here.

There is no point that we should be worried about from a monetary perspective. We might not want the recipients to have that standard of living – but that judgement will reflect political considerations. We might not be able to provide that standard of living – from the perspective of available real resources. But again this is not a financial constraint.

Please read my blogs – Democracy, accountability and more intergenerational nonsense and Another intergenerational report – another waste of time – for more discussion on this point.

Another rule of thumb I use when judging these sort of reports is to consider their boxed or highlighted statements. They usually tell you about the quality of the content. Consider this:

Amid the rancor about government’s role in healthcare spending, one fact is undeniable: government spending on healthcare now consumes 8.2% of GDP, compared with just 1.3% fifty years ago.

That might be true (I haven’t checked). But so what? It might mean that Americans are healthier or sicker. It might mean they are a bunch of pussies who need constant medical intervention. It might mean they are being plundered by a rapacious system of private health providers who overcharge, overservice and otherwise rip of the health consumer.

All of these “mights” could require a policy response. But what has any of that to do with the capacity of the US government to fund health spending? Answer: nothing at all.

So why highlight it in such a way and position in the text to generate alarm as if a crisis is pending? Answer: because the lie serves the ideological purpose of the Report.

The next highlighted box was:

Regardless of the emotional debate about entitlements, fiscal reality can’t be ignored – if these programs aren’t reformed, one way or another, USA Inc.’s balance sheet will go from bad to worse.

Balance sheet, bad to worse, nothing relevant there for anyone who really wants to understand the way fiscal policy works and interacts with the non-government sector to influence prosperity. Just ideological guff!


I have to get to the airport now and get back to Newcastle. So my time is up!

Usual cheery day reading this sort of rubbish. My detective novel at present is at least interesting.

That is enough for today!

This Post Has 24 Comments

  1. A bit off topic, but there is an amazing chart in the “USA inc” publication which shows how life expectancy relates to spending on health and medical treatment. See p. 111. (It’s best to click on the “slide” button at the bottom left). The US spends far more than other nations, but fails to make this translate into increased life expectancy.

    This is reminiscent of Tony Blair’s big increase in spending on the British National Health Service, which according to such evidence as there is, failed to produce improved productivity by British doctors, nurses, etc. The moral is that throwing money at a problem does not necessarily solve the problem.

  2. “The moral is that throwing money at a problem does not necessarily solve the problem.”

    Primarily because first you have to determine what the problem is you are trying to solve, and whether it is really a problem. The current rejig of the NHS pushing the budgets into the hands of doctors is another example of trying to solve a problem that doesn’t exist.

    The NHS is a 60 year old institution and has high entropy. However it delivers a reasonable level of national health care for much less GDP than the US with their market system.

    There comes a point when you have to admit that it is probably as good as it gets and that alternative organisational structures are unlikely to be any better with something so vast.

    The constant bouncing between centralised and decentralised structures as bright sparks sell the benefits of the other structure but having forgotten (or blocked out) the disadvantages is what keeps consultants and systems designers in a job for life. I’ve always found it amusing – if a bit disheartening.

  3. Bill, I have been reading your blog every day for a couple of months now, and your writing is undoubtably very good. However, I think it would be best to note that it is not just neo-liberals and conservatives who think the budget needs balancing. I would guess that in excess of 99% of people think that the government is revenue constrained like a household – it is just that Rush Limbaugh and his buddies have loud voices.

    There are others that believe the growing inequality in the USA has to be stopped and reversed, and increasing taxes on the rich is part of the solution. These journalists and commentators are occasionally deficit hawks just like their conservative counterparts, yet it would be unfair to suggest that they want a kings and slaves society like Sean Hannity. Most people just don’t understand, thats all.

    If I were in your shoes, I would leave the words like “neo liberal”, “conservative” and “right wing idealogues” out of the discussion. Economics should be about facts, not politics (which is the reason why 90% of economic commentary is unreadable). On top of that, there is nothing wrong with leaning to the right – on some issues, I am very far right. Using words like those above could turn some readers away, as they might think you are politically motivated like most others. It seems this is not the case, and you use your knowledge of key facts to explain why a much higher standard of living for everyone is attainable, but others may not be so convinced.


  4. @ Ralph

    I think this is quite simply because medical treatment temporarily fixs the repercussions of the problem, but not the problem itself, which can only be solved outside the hospital.

  5. “I would guess that in excess of 99% of people think that the government is revenue constrained like a household – it is just that Rush Limbaugh and his buddies have loud voices.”

    aint this the truth,

    you should see the looks i get from very smart well educated people when i try to explain why the state isnt revenue constrained.

    the usual retort is , “but what about inflation”

    when i proceed to explain to them why igbc is a load of old geriatric shoe makers(cobblers) they get nodding head syndrome.

    they pretend to agree , but the doubts and prejudice remains.

    the worrying thing is , some these folk are policy advisors

    always watch out for people who nod their head too much, it means they are not listening and you’ve lost them.

    but i think demographics are on mmt’s side, a larger older retired cohort of the popultaion, leading to a long term decline in spending power, and less tax revenue for the government, is going to cause a major re think about how the government can replace that lost spending power into the coming decades.

    unless, the first law of geography rears its ugly head, that is larger populations infiltrate and sub sume smaller ethnically different populations.

    lower income taxes, or dare i wish it no income taxes, and much larger budget deficits.

  6. Sadly this became the BusinessWeek cover story.

    Mary Meeker is a failed Silicon Valley analyst.

    As said above, EVERYONE believes this. I would say 99% of Democrats on the US totally agree with their premise.

  7. The solution to the “unfunded liabilities” problem is simple: fund them. That is, swap long term nominal government bonds for equity. This reduces the risk that an inflation constraint will prevent the government from meeting its promises. Note that this funding operation doesn’t require any austerity measures.

    After all, the deficit hawks have a point that governments make promises that they might not be able to keep. We know, as they do not, that the reason won’t be a lack of revenue, but that doesn’t change the fact that there is risk.

  8. Vincent Cate makes the comparison that a company issuing shares is a bit like a country spending money and a company conducting a share buy back is a bit like a country taxing except that gov gets to do it for free. Perhaps saying that money is to the gov like shares are to a company is the best stab at a USAinc comparison.

  9. Yes, in the US we have a huge number of people drinking the “federal government revenue restraint” Kool Aid. It is on the TV news 24 hours a day. It is on National Public Radio without rebuttal. Marsall Auerback and Yves Smith work their way into a talk show or two each month and that is about all there is for pro-MMT commentary. It is only on the worldwide web that MMT even begins to get a hearing in the US.

    I have a list of about 50 people that recieve my comments on economic articles du jour that I email out several times a week. Many are listening closely to the MMT arguments and articles that I present. Several have been won over. From my exprience it is the inflation question that creates the biggest fear factor and thereby stumbling block to understanding MMT. People do not understand inflation and instinctivelys fall into some kind of quantity of money thinking. This is the easiest way to disregard MMT. It is almost like we need to attack this kind of thinking first. I am trying to work on a rap that gets this out of the way, while at the same time introducing the idea that their is no revenue restraint.

    Thoughts anyone?



  10. Just chiming in from the US to reinforce Adam and Alex’s point: Everyone over here believes that the government needs to rein in spending. At best, I’ll find some Keynesians who believe we should spend more now and then run a surplus in the future to fix things. Usually, I find people who don’t know what to do but think something drastic must be done in the way of cuts. There are also plenty of people who think government debts are immoral and that we are “living beyond our means.” One of my favorite (liberal) blogs has been repeating this idea continuously for the past few months…

    The most disheartening is hearing educated people who would describe themselves as “very liberal” complaining that Congress isn’t cutting the right programs and that Social Security, Medicare, etc. should be on the chopping block. Or more recently that the Japanese quake/tsunami is going to be impossible for Japan to recover from because the government has no more capacity to borrow. Its getting tiring having the same conversations again and again and again. I don’t know if its having any effect.

    Basically, the entire political spectrum over in the US believes in austerity. It’s not just the right-wingers over here, its the left-wingers too (though they may not qualify as left-wing by, say, European standards). Even those few fighting it have no counter-narrative and are mostly focusing on the logistics of the battles. The argument is over how much and where to cut, not whether cuts are necessary.

  11. “This is reminiscent of Tony Blair’s big increase in spending on the British National Health Service, which according to such evidence as there is, failed to produce improved productivity by British doctors, nurses, etc. The moral is that throwing money at a problem does not necessarily solve the problem.”

    “We estimate productivity growth for the period 2003/4 to 2006/7. Improvements in the recording of community care activity between 2003/4 and 2004/5 give a misleading impression of output growth for the NHS. To avoid this, our preferred (and more conservative) estimates are based on the secondary and primary care sectors, which account for 75% of NHS expenditure. The main findings are that:
    Between 2003/4 and 2004/5 input growth was matched by output growth.
    Since 2004/5 there have been productivity gains with output growth exceeding input growth.
    These conclusions are robust to various assumptions about how the input and output series are constructed.

    The primary factors driving these recent productivity gains are:
    Increases in the number of patients being treated,
    Improvements in the quality of care patients receive and
    A slowdown in staff recruitment and the use of agency staff.”

    “the National Health service is rated 1st out of seven for efficiency and 2nd out of 7 overall.”

  12. Yes, John. No matter how much its citizens and insane politicians complain, the UK has the most efficient health care system in the world. From my limited observation, lots of pols have been trying to destroy it for a long time by starving it, so throwing money at it sounds like a good idea. But the UK delivers better health care to its poorer citizens than the USA does to the well-to-do. On the US system, to quote Marcia Angell, formerly editor of the New England Journal of Medicine, “If we had set out to design the worst system that we could imagine, we couldn’t have imagined one as bad as we have.”

  13. Max: “After all, the deficit hawks have a point that governments make promises that they might not be able to keep. We know, as they do not, that the reason won’t be a lack of revenue, but that doesn’t change the fact that there is risk.”

    Let’s not sugar coat it, Max. The reason is the deficit hawks themselves. If we defeat them we eliminate that risk. 🙂

  14. You would expect the consensus on national debt issues would be challenged by empirical facts. Obviously the dire consequences they portend will not happen. There is hope some brave souls will scramble to their senses. As Bill has pointed out it is a religious belief. When confronted by contrary facts they will ignore the facts or make up a new story.

  15. I think Religious ideas are formed largely the result of a desire to achieve a certain social outcome. These ideas become entrenched and can cause a lot of problems down the road under a different set of circumstances.

    It could be the social outcomes desired by MMTers are not in accordance with the desires of the majority. However, I am optimistic many others desire the same objective but are taking the wrong path through ignorance (or wrong signage).

  16. Ken Simpson: “From my exprience it is the inflation question that creates the biggest fear factor and thereby stumbling block to understanding MMT. People do not understand inflation and instinctivelys fall into some kind of quantity of money thinking. This is the easiest way to disregard MMT.”

    I cannot say that I understand inflation well enough to say anything convincing. I can only mention some statistics and quote others. But as far as the debate in the U.S. is concerned, I regard people understanding or admitting that the gov’t is not broke and is not in danger of bankruptcy, that Social Security is not broke, and so on, as a victory. It is also a victory if people realize that, if we want households to save money, that means that the gov’t has to run deficits. (We are hardly going to become an exporting nation any time soon.) Most Americans want to reduce unemployment and to maintain Social Security, but a lot of people think that we do not have the money to do so. Getting over that hump is major. 🙂 As for worries about inflation, I say that we need some inflation right now. 😉

  17. Senexx,

    Am I going potty with big numbers or is the total of net private saving only 60 billion dollars.

    Doesn’t seem much …… like only equal to the net worth of Slim Carlos.

  18. If we’re being “invited” to see the US govt. as a public corporation, then the subtext is: no messy political process involving popular votes, legislatures, judicial review, etc..
    Can anyone think of a word for that sort of arrangement?

  19. Andrew, you’ve got the figure correct.

    It is important to remember that number is the Australian savings.

    I found on another blog, I wont link to because it’s horrid and about Barnaby Joyce, that 12 months ago it was around 120 Billion.

    Remember though, we’re all currently using that money to pay down our debts so it is likely to shrink.

    On top of that the government wishes to return to surplus so will be taking away some of that money too causing it to shrink even further unnecessarily.

  20. @Senexx

    Bloody hell we don’t have a lot of money. Lost of that must belong to the 100 richest Australians. Packer and the like.

    We do have a lot of debt on overpriced house though.

    Without high terms of trade for commodities I can’t see the party here continuing for more than about 5 mins.

  21. @Andrew

    It works out about 7 grand each if we all had an equal share. So if you’re lucky enough to have that much (or more) in your savings account, I figure you’re doing all right.

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