Sale of the Century
Ferguson, Niall, Newsweek
Byline: Niall Ferguson
The deficit debate remains fixed on tax hikes and spending cuts, but there is another option.
In my favorite spaghetti western, The Good, the Bad and the Ugly, there is a memorable scene that sums up the world economy today. Blondie (Clint Eastwood) and Tuco (Eli Wallach) have finally found the cemetery where they know the gold is buried. Trouble is, they're in a vast Civil War graveyard, and they don't know where to find the loot. Eastwood looks at his gun, looks at Wallach, and utters the immortal line: "In this world, there are two kinds of people, my friend. Those with loaded guns -- and those who dig."
In the post-crisis economic order, there are likewise two kinds of economies. Those with vast accumulations of assets, including sovereign wealth funds (currently in excess of $4 trillion) and hard-currency reserves ($5.5 trillion for emerging markets alone), are the ones with loaded guns. The economies with huge public debts, by contrast, are the ones that have to dig. The question is, just how will they dig their way out?
The conventional wisdom holds that, aside from resorting to inflation or default, debts can be reduced only through belt-tightening austerity measures--some mixture of higher taxes and spending cuts. And yet politicians are notoriously leery of proposing hikes or cuts big enough to make a real dent in the debt. President Obama's latest budget proposal includes a five-year freeze on nondefense discretionary spending and tax increases on higher earners. But even if all goes according to plan, the gross debt will still rise above 105 percent of gross domestic product--and stay there.
The root of the problem is, of course, a lack of political will, extending down from the president himself to the lowliest Tea Party activist living on Social Security and Medicare. But a convenient excuse for ongoing borrowing is also provided by Keynesian economic theory, which states that a fiscal squeeze will tend to reduce economic growth, thereby widening the gap between revenues and expenditures. Fiscal hawks respond that a bond-market panic induced by excessive borrowing could be even nastier.
Yet there is another fiscal option that neither party seems to be considering. The U.S. needs to do exactly what it would if it were a severely indebted company: sell off assets to balance its books.
There are three different arguments against such asset sales. The first concerns national security. When Dubai Ports World bought the shipping company P&O in 2006--which would have given it control of facilities in a number of U.S. ports--the deal was killed in Congress in a fit of post-9/11 paranoia. The second argument is usually made by unions: private or foreign owners will be tougher on American workers than good old Uncle Sam. Finally, there's the chauvinism that surfaced back in the 1980s when the Japanese were snapping up properties like Pebble Beach. How could the United States let its national treasures--the family silver--fall into the hands of inscrutable Asian rivals?
Such arguments were never very strong. Now, in the midst of the biggest crisis of American public finance since the Civil War, they simply collapse. First, standards of public safety and security are unlikely to be compromised by a change of ownership unless military technology is involved (and the U.S. has already sold a startling amount of that to foreigners, by the way). Second, the goal of public policy should not be to protect public-sector workers from market discipline that will raise their productivity. Finally, why is selling assets to Asians worse than paying them an annual rent called interest on the national debt?
The mystery is why freedom-loving Americans are so averse to privatization--a policy that has been a huge success nearly everywhere it's been tried. From Margaret Thatcher's Britain, where the word "privatization" was coined, to present-day China, selling off government-owned industries has not only improved the fiscal position of governments; it has usually enhanced the efficiency with which the sold assets are managed. …