...against fictions and other tall tales

Monday, 6 June 2011

Corporate vs. government debt: putting things in perspective

The United States generates approximately $14.5 trillion in GDP each year and carries, currently, $14.3 trillion in debt. That represents a debt-to-income ratio of roughly 1-to-1.
By comparison, here are the debt-to-income ratios of some of the leading corporations in America:
•IBM — 2-1
•Dupont — 3-1
•United Technologies — 3-1
•Boeing — 4-1
•Caterpillar — 14-1
•JP Morgan Chase — 50-1
In other words, IBM borrows twice as much money as it earns annually. Boeing borrows four times more than it earns. And JP Morgan Chase, clearly not too big to borrow, borrows 50 times more than it earns — getting $50 from lenders for every $1 it makes.
I've always thought that reminding people of these facts was a pretty good way of demonstrating how the notion of eliminating public sector deficits is misguided.

And in case you're wondering: no, the analogy isn't faulty. In fact, Bill Vickrey, the late economist and Bank of Sweden Nobel laureate, made a similar case in favor of government budget deficits a decade ago:
If General Motors, AT&T, and individual households had been required to balance their budgets in the manner being applied to the Federal government, there would be no corporate bonds, no mortgages, no bank loans, and many fewer automobiles, telephones, and houses. (p. 2)
Still, some disagree with comparing private and public debt on the grounds that government spending, unlike the product of private industry, is unproductive. If you happen to adhere to this view, I suggest you take a look at "Is Public Expenditure Productive?" by David Aschauer, a former economist of the Federal Reserve Bank of Chicago. According to Aschauer (and contrary to what most people believe), additions to the net capital stock of public infrastructure have a positive impact on overall productivity growth.

Aschauer, D., "Is Public Expenditure Productive?", Journal of Monetary Economics 23, 1989, pp. 177-200.

Vickrey, B., "Fifteen fatal fallacies of financial fundamentalism: A disquisition on demand side economics", Working Paper No.1, January 2000. A copy of the paper is available on the website of the Center for Full Employment and Price Stability, http://www.cfeps.org/pubs/


  1. good work. liked Aschauer reference. You put it together well.

  2. Thanks Goffredo. Glad you find this useful.