Wednesday, July 13, 2005


I have yet to encounter articles on the desirability of Fed budget deficits. Today's news states that due to increased tax revenue, the Fed deficit this year was reduced $100 B, but is still at $338 B. This in conjunction with a story I saw in Monday's Wall Street Journal (about corporate cash reserves being at an all-time high) had me thinking about the following: As corp debt is to some degree desirable, can gov't debt ever be?

Principally, corporations leverage themselves so that they can invest in what they are good at and make a considerably higher return than the interest rate on their debt. Could there ever be such an economic justification for gov'ts? Or is it just poor management, coupled with crisis spending, i.e., wars, hurricane relief, etc?

Update: Todd Zywicki at the VC has posted an detailed response to my question. Note several of the comments, including the article which TZ refereneces at the bottom. Another particularly good point is that Corp debt is largely a function of tax breaks, not at issue in government borrowing. However, I disagree with the comment that corp debt would not exist without such incentive. Clearly some startups and seasoned firms would still take on debt, so that the principals of the company wouldn't have to share their equity at every step of the road in corporate America.