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Americans have heard many times that Uncle Sam’s borrowing puts a terrible burden on their children and grandchildren, because they’re the ones who will have to pay the money back someday.
But former congressman Mark Neumann, a Wisconsin Republican running for U.S. Senate, contends the borrowing has a pernicious present-day effect as well.
In a June 13, 2012 radio interview, Neumann said that if the federal government didn't borrow $1.2 trillion every year "to fund government operations," that money would be available "for entrepreneurs and business people to put to work creating jobs and building and expanding their businesses."
There’s essentially one pot of money out there and every time the federal government sticks it beak in, there’s less for private businesses -- even with interest rates at near-record lows?
Here’s the relevant exchange between Neumann and talk show host Mitch Henck of WIBA-AM (1310) in Madison:
Henck: "We need something bold, don't you, to get this economy going?"
Neumann: "Well, I think balancing the federal budget so that the federal government stops borrowing $1.2 trillion out of the private sector is going to help our economy immensely. When you think about the federal government taking $1.2 trillion out of the private sector to fund government operations, you can see what's wrong with our economy."
Henck: "Aren't they taking that from the Chinese? They're borrowing that money, aren't they, Congressman?"
Neumann: "They are borrowing that money and that's the point exactly. If they did not borrow that money, that money would be available out here in the private sector for entrepreneurs and business people to put to work creating jobs and building and expanding their businesses.
"As it is -- and listen, I'm a business owner myself, I've been in business for 35 years here in Wisconsin creating Wisconsin jobs -- and the reality is, I understand that I'm now competing against the federal government to borrow money to expand our businesses. We just expanded into the Madison market to the Dane County area with our business and it was a monumental task to arrange the financing to do that because the federal government is taking $1.2 trillion first, before any of us entrepreneurs get to compete to borrow money."
We called Neumann to ask him to elaborate on the relation between borrowing done by the federal government and borrowing done by an individual or business on Main Street. He repeatedly said that if the U.S. government didn’t run annual deficits of about $1.2 trillion, necessitating the borrowing, that money would be available to businesses and individuals.
We asked five experts about Neumann’s argument.
"This is a fairly straightforward, almost master of the obvious-type statement," said J.D. Foster, senior fellow in the economics of fiscal policy at the conservative Heritage Foundation in Washington, D.C.
Money is loaned first to the U.S. government because it is considered "the riskless borrower," and the money the U.S. borrows isn’t available to others, he said.
OK, the same dollar can only be loaned one time. But does U.S. borrowing, as Neumann claims, leave less money for businesses?
Not according to the other experts.
"The U.S. government and American entrepreneurs are not running after the same pool of money," said Abdur Chowdhury, chairman of the economics department at Marquette University in Milwaukee. The U.S. borrows largely from overseas -- by selling securities -- while domestic businesses borrow mostly from domestic banks, he said.
The notion that the amount of federal borrowing limits money available to be loaned to businesses "is absurd on its face," said Dean Baker, co-director of the liberal Center for Economic and Policy Research in Washington.
"Every single measure of the interest rate (Aaa bonds, Baa bonds, mortgage loans, car loans etc.) is lower today than at any point in the (George W.) Bush administration," he said by email. "If government borrowing were pulling money away from businesses, it would be by pushing up interest rates."
Barry Bosworth, senior fellow in economic studies at the Brookings Institution in Washington, agreed. Neumann’s statement "makes little sense right now because the basic problem is the opposite -- no one wants to borrow, and hence interest rates are near zero. If we could get more people to borrow and invest, the economy would quickly recover," he said.
Bosworth, a former adviser to Democratic President Jimmy Carter, said Neumann’s claim might have been true prior to 1970, when "capital markets were closed at the borders." But since the 1990s capital markets are global and U.S. government borrowing doesn’t "crowd out" businesses seeking capital, he said.
Andrew Reschovsky, professor of public affairs and applied economics at the University of Wisconsin-Madison, said that among other reasons, Neumann is proven wrong by "basic economics."
Increased federal borrowing should increase demand for money and raise interest rates, which would discourage businesses from borrowing, but interest rates have been at or near historic lows, he said.
Neumann said that if the federal government didn't borrow $1.2 trillion every year "to fund government operations," that money would be available "for entrepreneurs and business people to put to work creating jobs and building and expanding their businesses."
While it’s true you can only lend the same dollar once, the consensus among experts we consulted is that the level of federal government borrowing does not leave less money available for businesses to borrow -- or as Marquette’s Chowdhury put it: "It’s not a zero-sum game."
We rate Neumann’s statement False.
WIBA-AM, Mitch Henck interview of Mark Neumann (at 10:10), June 13, 2012
Interview, Mark Neumann, June 22, 2012
Interview, Heritage Foundation senior fellow in the economics of fiscal policy J.D. Foster, June 26, 2012
Interview and email interview, Brookings Institution economic studies senior fellow Barry Bosworth, June 26, 2012
Email interview, Center for Economic and Policy Research co-director Dean Baker, June 26, 2012
Interview, Marquette University economics department chairman Abdur Chowdhury, June 26, 2012
Interview, University of Wisconsin-Madison professor of public affairs and applied economics professor Andrew Reschovsky, June 26, 2012
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