No one just chooses to borrow money. What an obnoxious conceit, one that imagines lenders are blithe about those loaned to.
More realistically, those with title to money decide who can and cannot borrow. And they’re very strict.
Individuals with credit cards know this well. We don’t choose how much debt to run up, rather we’re told how much we can.
Businesses similarly don’t choose their level of debt, it’s chosen for them. Established ones sometimes have “credit lines” at banks, and even bigger institutions go into the markets to borrow or raise much bigger sums. Private debt doesn’t just happen as much as those with money carefully loan it to individuals and businesses seen as having the capacity to pay it back. The herculean power of compounding instructs that it’s incredibly expensive for the lender if the borrower walks the loan.
Which brings us to a recent piece on California and its Governor Gavin Newsom. Writing at Fox News, Ted Jenkin asserts about California that “when you peel back the layers, what you really find is a state government that can’t stop spending, can’t plan for the future and is now caught in a structural budget crisis of its own making.” Jenkin could probably be persuaded to rethink his analysis of California’s debt situation, along with Newsom himself.
Imagine, for fun, if Newsom were governor of Mississippi. Would Mississippi have the $18 billion in debt that is presently giving Jenkin the vapors about California? It’s a clown question, but in the question we find the seeds of a government debt discussion that gets dumber by the day. And that’s not a dig at Jenkin. Again, the view here is that he could be convinced to rethink his analysis.
As “Mississippi Governor Gavin Newsom” in quotes attests, Newsom wouldn’t be one of the most (if not the most) profligate governors in the United States. And that’s because Mississippi can’t lay claim to tax revenues in the present or future that are anything like California’s.
Think businesses like Anthropic, Apple, Databricks, Meta, Nvidia, OpenAI, and many, many more that are in California as your explanation for California’s debt. Jenkin writes that “the Golden State isn’t so golden anymore,” but those with money they’re trying to get a return on must think about returns, not politics. And while all sorts of bad policy can be found all over California, by far the most enterprising people on earth can also be found there. Since Sacramento has taxable access to all this otherworldly wealth-creating talent, borrowing for the state’s politicians is easy.
Jenkin quips that California is where “fiscal discipline goes to die,” but such a comment suggests that politicians in other U.S. states are closet classical thinkers who, like this writer and presumably Jenkin, believe that government spending is the cruelest, most economy-sapping tax of all whereby politicians substitute themselves for the marketplace in allocating precious resources. Not really. Politicians exist to spend, and they’ll borrow if allowed…by the marketplace.
That’s why most U.S. politicians can’t borrow anything like what California borrows. See once again where the most valuable companies and richest people are if you’re confused. Without defending Gavin Newsom or California’s borrowing for even a second, it’s not a choice as much as it’s an effect of forward-looking markets projecting exponentially greater tax revenues flowing into Sacramento in the future.
Jenkin sees a “structural budget crisis” in California, but market signals paint a different picture. To suggest otherwise is for Jenkin to suggest markets are stupid, and the historical view inside Fox has long been that markets are many things, none of them stupid.
Originally posted to Real Clear Markets.
