The Middle Class, What Might Be Done to Stem its Demise?

Within the context of globalization and minimal disruption to the Free Market, what can be done to restore a situation where a significant portion of the population of the US is able to live well and follow the “American Dream”? Contrary to popular Right Wing opinion, there is a role for Government in the solution. We have plenty of capital in this country though it has dramatically shifted from the middle to the high end and at the moment, much of it lies dormant. We can continue paying a decent wage to people who do not compete globally. The question is what can we do for the merchants, and workers who are displaced by the Free Market? Currently, the farmers are subsidized though as the Right is pushing to reduce the benefits to workers the Left will, if it hasn’t already push to reduce the subsidies to “small farmers”.

Throughout recent history, as the markets churn, creating and destroying, one role of governments has been to see to the people who are disadvantaged in the process. If people are allowed to broadly suffer from market changes, the populous will not cooperate with the changes, the number of consumers will diminish and the markets will implode. There is also talk that industry will no longer need hard working, strong backed individuals but will primarily employ a creative workforce and one with analytical or “people” skills. When more and more of the strong-backed individuals start sinking into poverty, not only will there not be cooperation, there will be social unrest of epic proportions.

We as a nation could decide not to bust unions and continue paying good wages and benefits to the public service sectors and increase the wages paid to others in the “local” economy and allow jobs subject to globalization where we are not competitive to go elsewhere as they will anyway.

If we look around there are many things we can see, changes to which could improve the quality of life for all of our citizens, rich and poor. We can invest in initiatives that will improve everyone’s quality of life such as:
Eliminating slums
Improving facilities and activities that keep our young people off the streets and out of gangs.
Change the economic conditions so that infants can be allowed to more properly develop in a stress free, loving home.
Improve dilapidated neighborhood and public areas
Improve basic education
Increase access to education beyond the three Rs such as music, art and sports
Eliminate poverty
Improve our infrastructure
Once I heard it said that a society is judged by the magnificence of its architecture and I believe there is some merit to that observation. The bleak public building erected in the last century in the Soviet Block is a testament to this. (I was in the former East Germany a few years ago and saw buildings of that era that were nothing but huge “boxes”, very strong and functional but with no esthetic appeal whatsoever.) The general architecture in the post-industrialized era in the west is not far removed. The reasoning for this was that when life is very hard, there is no energy, resource or time for niceties.

Making these improvements in our overall quality of life can give meaningful employment to those that are displaced by the market churn. Improve labor laws, eliminating some of the excesses of labor unions and not only allow, but encourage collective bargaining to keep wages at a decent level. None of this will impact our ability to compete globally. In fact it should continue and increase our attraction to talent from across the world. Our industrialists and financiers are not negatively impacted by the flow of jobs out of the country and the shrinking of the consumer base here will be offset by the rise elsewhere. Their wealth will increase through all these shifts. We have the resources, though in the hands of a very few to do this. We now need the political will to channel these resources more for the benefit of society as a whole. We can increase taxes, particularly on the most affluent. The fear is that they will flee and take their riches with them. If we believe that we are truly “exceptional”, they will not. Eliminate duel citizenship (I have a hard time understanding how one can swear allegiance to two different countries, each with its own interests) and if they leave and want to come back impose a very high price for reentry.

The Middle Class, its Makeup and Decline

Today there is much talk about the shrinking of the middle class and the growth in income inequality. I believe both are not only true but an existential problem. Here is my take on what may be some underlying causes. First I am not sure there is anything close to a common definition of what is the “middle class”. I’ve heard the term “middle income” used interchangeably with “middle class but it does not have the same meaning. It is strictly a mathematical definition as either the median or average income with the median being closer. For the sake of this discussion I will define the middle class as follows: People who derive their income either from wages working for others or from wages/profits working for themselves who can afford to own a modest house or rent a modest apartment, send their kids to college, retire without sinking into poverty and if they forgo many extravagances, have a small vacation home to retire in. At the height of our middle class, this could be achieved with only one member of the family working. Today it takes two incomes. In general I think that it takes income between $50K and $150K, depending on where one lives. (It may be much to low an estimate. It is only my guess based on nothing.)
The problem started decades ago but was not obvious for reasons described by Robert Reich in the December 6th Huffington Post.
“For many years, credit cards and home equity loans papered over the harsh realities of this new economy. But in 2008, the house of cards collapsed. Exactly. But the first papering over was when large numbers of women went into paid work, starting the in the late 1970s and 1980s, in order to prop up family incomes that were stagnating or dropping because male wages were under siege -- from globalization, technological change, and the decline of unions. Only when this coping mechanism was exhausted, and when housing prices started to climb, did Americans shift to credit cards and home equity loans as a means of papering over the new harsh reality of an economy that was working for a minority at the top but not for most of the middle class.
We all know the story by now: Mortgages sold to people who couldn't afford them, or sometimes even understand them. Banks and investors allowed to keep packaging the risk and selling it off. Huge bets -- and huge bonuses -- made with other people's money on the line. Regulators who were supposed to warn us about the dangers of all this, but looked the other way or didn't have the authority to look at all.
It was wrong. It combined the breathtaking greed of a few with irresponsibility across the system. And it plunged our economy and the world into a crisis from which we are still fighting to recover. It claimed the jobs, homes, and the basic security of millions -- innocent, hard-working Americans who had met their responsibilities, but were still left holding the bag.”
What is the makeup of this “middle class”? Following are a few examples.
People working for others
Local, state and federal government workers represented by unions such as janitors, teachers, firemen, policemen, garbage men, etc.
Production workers in low to moderate skill level jobs in manufacturing in unionized shops.
Medium to high skilled technicians working in technology companies
Mid grade management staff in manufacturing
Unionized construction workers
Mid grade engineers and scientists
Nurses and medical technicians in not-for-profit medical facilities
Upper management in the restaurant and tourist trade
Lower management in industry
People working for themselves
“Mom & Pop” shops & gas stations
Restaurant owners
Beauticians
Building sub-contractors
Small “Family” farmers
Very small factory operators

Reich pointed out in his post that the decline in the “middle class” and the resulting income inequality (he is talking about the US) is attributable to globalization, technology and decline in unions. The first two are natural consequences of Free Market activities. As I have mentioned in numerous posts, the market knows no boundaries, has no conscience and its benefit to society, which indeed exists, is strictly coincidental. This is not a criticism but a statement of fact. Indeed, over time, the quest for profits has created products and services that make life easier and more interesting for an ever-increasing segment of the population. In a free market, enterprises seek the highest profits. They achieve this through lower costs and the ability to differentiate. Since labor represents much of the cost in manufacturing, enterprises seek locations with the lowest labor costs. Within the United states, companies migrate from Northern high wage regions with strong union representation and strict regulations to poor Southern States with cheap labor and lax regulation. The same thing happens on a global scale. In the fifties much of manufacturing went from the industrialized West to Japan which in turn lost it to Singapore and Malaysia who are now struggling to hold on to as much as they can with China’s ascendance as the new manufacturing juggernaut with India on its heals. All this is good for the poorer regions and bad for the richer. Years ago a colleague told me about a mural of a swamp in the cafeteria at Colby College entitle “alligator heaven, frog hell”. When viewed from a global perspective, the middle class has been and continues to grow. Worldwide more and more “poor” people are moving into the middle class and are better off today. In the Industrialized West, however, that is not the case. Some, though by no means all of the improvements seen in the “Third World” come at the cost of conditions in the industrialized countries.

This flow of jobs that once allowed for a middle class standard of living here in the US will not be able to be stemmed without disrupting the Free Market significantly. It is a natural and for the most part a desirable consequence of Free Market activities. This disruption would be ultimately to the detriment of everyone. Representing those earning wages from their labor/profits and business in general, the Right wants to move retreat back to the golden era of the twenties. To try to stay competitive, there is a strong effort on the Right to bust unions to drive down wages and benefits of workers make it easier to compete (ironically while at the same time increasing wages and benefits for upper management). The same people are also trying to undo health and safety regulations to bring down costs. It is interesting that the strategy a couple of decades ago was to “level the playing field” by forcing Third World countries to raise their standards up to our level. Now, in a panic, we are even talking about possible repealing child labor laws. (Although I don’t believe Newt’s comments are taken seriously) This is a poor strategy. Maybe in the very short term effective but in the long term as the middle class in the developing world grow the same regulations that were imposed in the West will, for the same reasons be imposed elsewhere and in the process we may have gone back in time so far, creating social turmoil that we may not be able to recover from and in the process get left in the dust.

Another thing leading to the decline in the middle class, also a natural outcome of a free market has nothing to do with globalization. Driven by the quest for profits, in an attempt to bring an ever-wider range of commodities at lower prices to a broader segment of the population, mega retailers such as Wall-Mart are making it difficult if not impossible for the “Mom & Pop” shops to compete. Haircuts that cost $50 in a beauty parlor can now be had in places like Super Cuts for $12 or $8 with a coupon. While the broader society benefits from lower costs, like the workers in the manufacturing sector, the small shopkeepers and businesses suffer.

Technological advances, also a natural consequence of free market activities, driven by the quest for profits leading to a need to differentiate, have changed the workplace. Information technology has eliminated many administrative jobs and ready availability of information eliminates much of the middle management responsibility.

The reasons for the decline described above are unavoidable. Some of the pain, however is self-inflicted. There are well paying jobs in the public sector and some in the private that cannot be exported and are of no significance in international competition. Teachers, firemen, police officers etc have to remain near the public they serve and cannot be exported. The Right is working hard to bring down their wages and benefits. Maybe it is because they feel that it makes it easier to bring down the wages of industrial workers if the public sector worker’s wages and benefits are reduced. Unlike manufacturing, here there is no economic necessity to do this. Relatively small increases in taxes on people who benefit most from globalization can easily allow this group to again live a “middle class” life.

In the next post I will discuss my thoughts of what can be done to maintain a decent standard of living for a large portion of the US population.

Job Creators; More Thoughts

I subscribe to the Liberal notion that the term “Job Creators” as used by Conservatives is code for wealthy individuals. I don’t believe there is a direct correlation between wealth and creation of jobs.
The legitimate quest of business, particularly manufacturing, is to do as much as one can at as low a cost as possible. So there is always a search for ways to reduce, not increase, jobs since much of the cost is in labor. Though much of the shrinkage in jobs, particularly higher paying jobs, in recent years is attributable to technological advances, during an economic downturn falling profits amplify the need to reduce labor and workers are pushed to increase their individual efficiency. With workers fearing for their jobs, the task is easier. Corporations have been extremely effective in reducing jobs during this recession as is evidenced by record profits. There is nothing wrong with this. That is how the system is supposed to work. So, in this sense, the people running business are not focused on “job creation” and should not be considered “job creators”. However, their attempt to increase the value of the enterprise is often accomplished through growth and growth can create jobs so if they create more through growth than eliminate through efficiency, they may be “Job Creators” coincidentally but certainly not by intent.
Much of the wealth today, however, is derived from investment and speculation in the stock markets. Are these investors also “Job Creators”? The fact that most laymen overlook is that when one buys shares in the stock market, with few exceptions, one is buying them not from the corporation but from another individual who owns shares in the company. The corporation is not at all involved in the transaction and the benefit to the corporation is only tangential at best. If many people buy shares it may increase the paper value of the corporation, which may make it easier for it to borrow money or issue more shares. But unless it does either of those, my buying the shares puts no money into the corporation and is inconsequential from the standpoint of creating jobs. So unless I am buying shares from a corporation directly, either through an IPO or new issue, I am not adding capitol to their coffers and even with a stretch cannot be considered a “Job Creator”
What about private equity firms? Are they “Job Creators”? Private equity firms gather money from large investors and operate somewhat like investors in the stock markets except having large amounts of capital they generally take controlling positions in corporations but are not subject to regulations imposed on the public markets. Bain Capital, a private equity firm headed by Mit Romney is used by Liberals to argue against Mit’s claim to being a “job Creator”. They purchased select companies that were flush with assets and unprofitable, convert the assets to cash for the investors, streamlined the operation by eliminating jobs and either took them into bankruptcy or sold them. Their gain comes from stripping assets and/or improving efficiency (by cutting labor) thus increasing profits and the value to the investors. Here again one cannot considering them “job creators”.
Governments, federal, state and local also employ labor, in administrators, teachers and public service and safety personnel. Though they provide jobs, they do not create jobs with the exception of the military and foreign policy activities. Unfortunately this job creation occurs during times of war and global stress. During war the federal government not only hires soldiers, but increases their purchase of weapons. Many foreign policy activities involve providing aid in the form of weapons to countries like Pakistan and Israel or allowing sale of weapons to Saudi Arabia and Taiwan to mention a few. These activities do create jobs but not necessarily the kind of jobs we want to strive to create.
So who are the real “Job Creators”? Venture capitol firms raise money from large investors and invest it in new enterprises or new projects in existing ones. They take on much greater risk than private equity firms and their successes do indeed result in new jobs. They and individuals invested in venture capital firms are truly “Job Creators”.
A very large portion of our GDP comes from consumption and ultimately the behavior of the consumer in the marketplace destroys, maintains or creates jobs. But, since we are embroiled in a global marketplace, we need to think of consumers and the jobs they create on a global scale. Much that is consumed in the US is mined, farmed or manufactured elsewhere and a portion of what we take from the earth, grow and build here is consumed elsewhere. However, regardless of where something is made, it is marketed and transported locally. So increases in demand for even product manufactured in China, as is the case with most of what is sold in Wall Mart for example, creates sales clerk, administrative and transportation jobs. Though the “middle class” has been shrinking in the US it is growing dramatically in “third world” countries and their consumption will have a strong impact on our jobs. The nature of the impact will be determined by how we navigate through the dynamics we are in the midst of throughout the world. Unfortunately on the right there is a simplistic view pushing for less government and lauding unsupported “exceptionalism”. Progress in an ever-shrinking world is a complex undertaking and will not only require government involvement but a “nuanced” one at that.

Uncertainty

I really hate political “one liners”. “job destroying”, “job creators”, Medicare killing” etc. My current least favorite is “uncertainty”. All economic woes, particularly unemployment, are attributed to the “uncertainty” faced by the “job creators”. Republicans have been using the term and more and more businessmen are jumping on board. We would hire people but for the regulatory and tax uncertainty.
During one of his early speeches Rick Perry talked about the great job he did in Texas creating an environment where businessmen could “risk their capital” to create wealth. (The Right attributes nobility to risk in business but never to sweat in labor. But that’s another topic) Getting back to risk of capitol and uncertainty. I particularly get riled when businessmen start whining about uncertainty. After all, a major justification for profit in business is the risk; the greater the risk the higher the potential for greater profit. A characteristic of a good businessman is the ability to manage risk.
Without uncertainty, where is the risk? What will be the price of tin? Will it be a rainy season or will we be faced with a major drought. What will the dollar trade for in Europe? There is always regulatory uncertainty. Stores selling wine worry about the impending lifting of restrictions that exist in some states on shipping wine by mail thus reducing their monopoly. Funeral parlors worry about removing restrictions on transporting corpses across state lines. My Father in Law passed away in Massachusetts and was to be buried in NY. A New York undertaker could not pick up his remains from his residence. By law, we had to get a local undertaker to take the body to the Connecticut border, transfer it to a hearse that took it to the NY border where finally a New York undertaker moved him to the place where he was to be prepared for the burial. (A secondary point I am trying to make is that not all regulation is anti business. Many, if not most, regulations are lobbied for by business trying to limit competition, the greatest detriment to profits.)
Anyway, risk, and by implication uncertainty, whatever its nature, is an inherent part of business and one of the factors that conservatives point to that distinguish business from labor. I don’t mean to suggest that risk is not a strong consideration in business decisions. The greatest is the risks of making a profit and since income taxes are a tax on profits they do not affect amount of profit but what portion of it will remain with the organization or individual to do with whatever. Though regulations do affect the cost and availability of supplies and labor, they are with some exception minor. Some notable exceptions are tighter immigration regulations will restrict the availability of cheap labor and there is indeed a cost for limiting pollution and increasing safety in the work place. I don’t believe there is any movement to increase regulation in the pollution or safety areas so the uncertainty may be in whether and to what degree the regulations will be eased not increased. That uncertainty, were it a real reason for economic slowdown, certainly could not be laid at the feet of liberals. There is always risk and there is always uncertainty in business but the emphasis of regulatory and tax uncertainty’s affect on employment is greatly overstated strictly for political reasons. The real uncertainty is when will the consumer get enough disposable income to start spending wildly again?

Society’s Impact on Good Parenting (Correction)

I previousloy duplicated the last post under this heading. Here is the correct one.

I have a fundamental belief that children are the most important asset to the future success of our nation. I further believe that there is a normal distribution of reasoning ability that is a genetic part of the individual and to maximize the probability of success we must allow them to rise to their maximum potential. I read and hear more and more that the jobs or the future depend on three attributes; analytical thinking, creativity and social skills. The first two of these, though they may be able to be enhanced by education, for all intents and purposes cannot be taught. As I discussed in a previous post on education, universities, though they do not create analytical thinkers or creative individuals, do “brand” them. The higher the degree, the greater the probability that they have these thought-after characteristics. With rare exception, individuals without degrees may not be recognized as being analytical or creative. So I am interested in expanding education to certify as many of the talented as possible. The more we get into our mainstream the better for our future.
As I have followed debates on education, I hear much about the importance of good parenting. The debate regarding the impact of parenting is not whether good parenting has an impact or not but is it a 50% or a 95% issue. That being the case the question boils down to how can parenting be improved?
May 5th I watched a special on Democracy Now, a very liberal broadcast, which featured a composite of three different interviews of Dr. Gabor Mata, a Canadian physician who studied and wrote about addiction, autism and attention deficit disorder. Gabor Mata, a Jew, born in Hungary during the Nazi regime and brought up in a home where the family was in work camps and in general, given the Nazi attitude toward Jews, under tremendous stress. As he discusses various studies he also often cites himself as an example of behavior consequential to his early upbringing. (I also find some relevance to my own symptoms though I am sure my formidable years were not nearly as terrible as his.)
He started by pointing out that unlike most mammals, the humans, because of the size of our brain need to enter the world before the brain is fully developed and spend the first two years of our lives continuing the development of the neural connections and whatever else goes on in the brain. During this period, for proper development, it is crucial to be in the presence of a calm loving person. He attributes the bulk of the above ills and their increase to improper development brought about by parents living under more and more stress and thus depriving the child of the environment needed to properly finish the development started in the womb. His conclusion is that whereas these diseases are considered and treated as medical or psychological maladies, they really are societal ills. He cites the increased stress brought on by deteriorating economic conditions requiring mothers in two parent households to work and the revision of the welfare system forcing single mothers to go into the workplace as conditions that remove the loving hand and their ability to comfort.
If there is merit to his argument, (I believe he has hit the nail on the head) what can we as a society do to improve the development of the infants and thereby improve our future society? In the LA area there are “Mother’s Clubs” which provide a setting where mothers from impoverished families can go and spend some time with their children in a calm atmosphere while learning to read and write and basic parenting skills. Though I think, such are very worthy efforts, they reach a very small number of people and don’t get to the root cause. The answer need to come in the form of policies that reduce the stress on families and allow for more parental contact during the time the brain is developing. The zeal with which the Conservatives want to punish “free riders” and thus improve our Nation may back fire. It may result in a society with ever increasing dysfunction which hurts them as much as the people they insist on not helping. To succeed in an ever competitive global economy we must deploy the best talent we can and not allow a significant segment to fail because of improper development. I can’t imagine a two year old being branded a worthless “free rider”, even by the staunchest Libertarian.
It would be interesting to compare the level of addiction, ADD and autism in various countries against the policies they deploy affecting early childhood development. All advanced industrialized nations are in essence Free Market Capitalist Welfare States though they vary with the level of “safely net”. The US has one of the lowest and along with the very low minimum wage and strong advantage of business over labor, makes it both easy and necessary for mothers to work. In countries like Germany and Italy with Christian Democratic governments, it is very difficult to fire a worker and minimum wages are high. High minimum wages make it harder to get childcare there than in the US and the increased job security for the man of the house makes it both difficult and less necessary for the mother to work. I am not suggesting that that is what we want to do but only giving an example of policies that may have a positive effect on early childhood development. In the former Soviet Union where everyone worked and there was extensive government supported child care, I suspect, along with the very high rate of alcohol addiction, there probably is also a high rate of ADD and autism, though they may lag substantially in diagnosing these.

Republicans Ideologically Opposed to Job Creation

I saw a segment on the tube featuring Marco Rubio, a potential Vice Presidential candidate and most likely a Presidential candidate in 2016, elected to Congress from Florida with strong Tea Party support. He was featured at a Ragan Library function escorting Nancy Ragan down the aisle. I suspect the honor of escorting the former First Lady could mean that he may be picking up Ronald Ragan’s mantle. At the podium he talked about government’s proper role and admitted there is one and clearly building infrastructure certainly is a valid government function. He quickly added the caveat however, that funding infrastructure is OK in and of itself but not if the purpose is to create jobs. I am surprised that this was not immediately picked up by the media or at least the progressives.
The statement chrystalizes the conservative position regarding jobs and workers and it confirming the conservative belief that any government attempt to interfere with the workings of a liaises-faire market with the aim of improving the prosperity of the general population is anti-American. An action that is very appropriate by any measure is wrong if the purpose of the action is to improve the conditions of wage earners. The benefit to society should never be a goal but a byproduct of commercial enterprise. Seeing Nancy Ragan on his arm confirms, to my satisfaction anyway, that Rubio is speaking for the Republicans. If this is their ideological position, what happens to the Republican promise made at the last election to put jobs at the top of their list of priorities? They can’t! This explains why all of the Republican focus has been on social issues, nothing to do with jobs and spending cuts, counter to job creation.
So expect a lot of noise and opposition from the right when President Obama unveils his “jobs agenda” whatever it is. The only way he stands a “snowballs chance in hell” of getting anything passed is to come up with initiatives that have another purpose, like improving infrastructure, with job creation as a silent byproduct and totally downplay the job benefit. Also their benefit needs to be so clear that it will be politically impossible to go against it. Otherwise whatever the policy proposed, the cry will be that the initiative, will impact the “job creators” ability to create jobs or that it somehow “punishes “job creators”.
The thing that continues to astound me is how many working people who suffer from this conservative position so vehemently support policies and ideologies that really destroy their chance for prosperity. Talk about “cutting off your nose to spite your face”.

Debt Ain't so Bad

Today one sees many comments in the popular medium comparing government finances to household or corporate finances. I won’t go into a detailed discussion on the differences between household’s, business’s and government’s finances and focus on some similarities between them relating to debt.
The first thing to acknowledge is that there are different kinds of expenditures in each that have similarities. In the household there are expenditures for subsistence, convenience and entertainment. These are current expenses, though necessary or at least desirable, their benefits do not accumulate. There are other expenditures such as dinnerware, furniture, household appliances, education, cars and houses whose benefit is felt over a long period of time. These can be considered investments. Current expenses need to be at least matched by income or the household puts itself at great financial risk. Investments, on the other hand, the benefit of which is realized over a period of time can also be paid for over time. Few households are in a position to pay for the larger of these out of current income or savings. And even fewer of us pay for a house or for that matter a car out of savings and borrow money which we pay back to the lender over time, 20 or 30 years for houses and 2 to 5 years for cars and maybe less for furniture and appliances. People who had mortgages or car loans were not looked down on as reckless or irresponsible. It is the normal way to live in modern times. In fact, being credit worthy was a source of pride.
60% to 70% of our GDP consists of consumption and is facilitated to a great extent by credit. The GDP is an indicator of prosperity in a society, and the lot of wage earners, improves as a society prospers with growing demand creating jobs. Until recently, when loans made by one lender began to be bundled with others and sold and re-bundled and sold, the lender had an interest in ensuring that the borrower had the wherewithal to make payments on the schedule agreed to. With the selling and bundling of mortgages, the lender no longer cared about the borrower’s ability to repay since they made their money from the sale of the loan. Requirements for creditworthiness and collateral were all but eliminated and high pressure salesmen, using what could be argued were underhanded tactics, convinced households to assume debt they had no way of repaying. Furthermore, household incomes have been stagnating while costs were going up so beside the poor loans taken out for investments, they started to use debt to pay for current expenses. Debt got a bad name.
Business debt is somewhat different than household debt. Whereas in a household, in most cases the income lags the labor by about a week or in some instance two, in businesses, particularly manufacturing, payment for an item produced can come in one, two, three or more months after it is purchased and the item may have been in manufacturing for weeks or months where it had been collecting costs. It is a common practice for businesses to borrow money to cover the lag between when they start spending and when they receive payment. These expenses, whether financed with debt or not, are part of the cost of a product or service. This is considered a legitimate reason for borrowing even though it is to cover current expenses. Plant and equipment, on the other hand fall into category of investment. From an accounting standpoint, whereas direct costs, (costs that go directly into a specific product or service), indirect cost, (costs that go into things like rent, maintenance of equipment), administrative costs and R&D reduce the profit, (price-cost=profit), investment (and income taxes) comes out of profit and as in the case of the household are paid for over a long term with debt because most businesses do not have enough cash flow. Businesses borrow money for their investments. The ability for a business to borrow money is an asset and is not a sign of weakness.
When it comes to the government, things become somewhat nonsensical. Whereas in households and businesses, investments are considered and treated differently than current expenses, in government accounting all expenses are considered current. Though a bridge, an aircraft carrier or a hospital will be used for decades, all the money spent is treated as a current cost and not differentiated from other costs. So when criticizing government spending, one should really consider whether the expenses and debt are investments or current expenses, even though the accounting doesn’t. Another difference between the government and households or businesses is its ability to print more money and raise revenues. Households and businesses can theoretically increase income as well but it is easier said than done. Governments can do it with a stroke of the pen.
As with households and businesses, there is a level of debt that is perfectly appropriate and works to the benefit of a society. I think that true “current” costs should be paid from revenues, either increasing or decreasing one or the other as appropriate. Investments should be financed with debt to the extent that money can be borrowed. Currently lenders are lending money to us at ridiculously low rates indicating that from their perspective the loans are reasonable with probability of repayment very high. Unfortunately the extreme Right has taken a position that all government expenditures, except defense, are bad and are trying to inhibit the borrowing of money or raising revenues.
There is another “proper” accumulation of debt that is the same for households, businesses and governments. In a period of temporary crisis, all may find themselves in a situation where the current expenses exceed income and need to borrow anticipating a return to normalcy at some point in the future. Our government has done this several times and there is a sharp peak in spending and debt followed by a rapid decline. During bad times lenders will lend but getting a loan becomes more difficult. In the case of households and businesses, there is a stronger demand for collateral, and their interest rates, along with those of governments are higher. There is an old saying that everyone is willing to lend you money when you don’t need it but very few when you do.
As to running the country like a business, a successful business’s credit is one of its major assets. The notion that it would be restricted by arbitrary limits or ratios would greatly inhibit a business’s ability to weather periods of turmoil or maximize potentials during periods of opportunity. I certainly would not want to run a business so constrained. In this respect government is very similar to business. In times of economic crisis that we are struggling to get behind us, increasing competition brought on by globalization and potential shifts in the balance of power throughout the world, we need to be careful of zealotry arbitrarily restricting our investments and debt. Reckless spending without accountability is bad but the notion that any spending and borrowing is bad and should be severely limited is naïve and can destroy a business as well as a country.