Ludwig von Mises, Bureaucracy (1944).
"The federal government has at least $1.6 trillion in liquid assets."
Most of the debate over the federal government's debt ceiling has taken it for granted that raising the statutory limit is unavoidable, unless the government is willing to engage in savage budget cuts and/or draconian tax hikes. Yet, if the owners of a private-sector operation wanted to stop a downward spiral into debt, one obvious solution would be to sell off assets to ease the transition to profitability.
Although the issue is seldom discussed, the federal government currently owns more than $1.6 trillion of liquid assets. At any time, free-market economists have a general presumption that private owners, relying on the profit-and-loss test, allocate resources to their most valuable uses. Especially given the current budget crisis, now is an excellent time to begin privatizing Uncle Sam's colossal holdings.
Running Government Like a Business?
In his slender book Bureaucracy,1Ludwig von Mises explained the fundamental difference between private-sector profit management and government-sector bureaucratic management. On the market, a business must operate through exchanges with suppliers and customers. The business must pay for every input and must convince its customers to voluntarily hand over their money for its product or service.
In this arrangement, those businesses thrive that transform inputs into finished goods (and services) that their customers value more than the original inputs. In contrast, those that squander resources—meaning that they transform them into goods and services of lower market value—suffer losses and, if they don't fix the problem, eventually shut down. According to Mises, the profit-and-loss system serves to preserve society's scarce resources and channel them into the most efficient lines of production.
Although political candidates often promise to "run government like a business," doing so is impossible. Governments derive their "revenues" from taxation, which is not individually voluntary. Thus, there is no automatic feedback mechanism by which inefficient government services will be reformed or shut down.
At the same time, in order to protect against gross corruption, political authorities must institute bureaucratic rules for their subordinates. For example, the mayor can't delegate the operation of the fire department to the Fire Chief to nearly the same extent as, say, a CEO can delegate his firm's Malaysian operations to a vice president. This is because the Fire Chief could decide to "save money" by, say, putting out fires only on Tuesdays or by trading in the pumper trucks for motorcycles. If he then gave himself and his buddies pay raises—since the city allocates a certain budget to the fire department out of tax revenues—the public would obviously be outraged. Since the fire department's "revenues" aren't directly tied to the performance of services for paying customers, the mayor and other politicians must establish detailed criteria for a "successful" fire department.
In contrast, the private-sector vice president can be given much more freedom of initiative, with the only goal being, "Make profit for the shareholders." If the vice president of Malaysian operations decides to (say) close retail outlets an hour earlier on weekends, and to give pay raises to increase retention rates of upper management personnel, these decisions aren't necessarily corrupt. If the division is consistently profitable, the shareholders will be satisfied that the vice president made the right decision. In any event, the customers are always free to take their business to a competitor, so they would never become as outraged as they might under the hypothetical fire department scenario.
Economists have offered numerous theories to justify government subsidies or outright enterprises in fields such as vaccinations, retirement funding, schooling, law enforcement, and military defense. These justifications are weaker or stronger depending on the particular area. However, in general, there should be a presumption against government intervention and in favor of a market-determined outcome because of the superior efficiency of management by profit versus bureaucracy.
The preceding analysis shows that the government is currently holding assets that clearly belong in the private sector, regardless of the fiscal situation. The following is a list of some of the major liquid assets held by the government, along with an estimate of their market value.
A Short List of Liquid Federal Assets
International reserve assets. As of June 3, 2011, the Treasury reported international reserve assets of $144.2 billion.2 They include gold, securities and deposits denominated in euros and yen, as well as "IMF reserve position" and "Special Drawing Rights" (SDRs). However, this figure is substantially understated, as the Treasury officially values its 261.5 million troy ounces of gold at a price of $42.2222 dollars each. If we priced the Treasury's gold holdings at the current market price of about $1,500 an ounce, then the currency reserve assets have a market value closer to $525 billion.
Other financial assets. According to the Federal Reserve, as of the end of the first quarter in 2011, the federal government held $786 billion in "credit-market instruments" (including $138 billion in agency- and GSE-backed securities, as well as $355 billion in student loans). The government also still held $55.4 billion in corporate equities acquired under the TARP.3
Crude oil in the Strategic Petroleum Reserve (SPR). As of late November 2010, the SPR held 726.5 million barrels of crude.4 At this writing, the price is about $95 per barrel; thus, this reserve is worth about $69 billion. However, the oil in the SPR is not equivalent to barrels ready for shipment at the benchmark hub in Cushing, Oklahoma5, but, rather, is buried deep in salt caverns.6 Consequently, the figure should be discounted by (say) 25 percent, so that the government's crude oil stocks can be conservatively appraised at $52 billion.
Offshore oil deposits. According to the government's estimates, the Outer Continental Shelf (OCS) contains 59 billion barrels of undiscovered, technically recoverable crude oil.7 Much of this huge cache of natural resources is currently off-limits to development, either formally or in practice, because of regulatory barriers to permitting. Although it is difficult to estimate the market value of oil that has not yet been discovered, a study of the impact of expedited offshore oil leasing estimated that the federal government could generate $14.3 billion in average annual royalty revenue from the eighth through thirty-eighth years after approving the projects.8 At a discount rate of five percent, this royalty stream has a present discounted value of $164 billion. Rather than the traditional approach of leasing the oil rights, the government could, instead, sell the bundle of rights upfront for a lump-sum payment, getting much quicker access to the money.
The assets listed thus far have a total estimated value of nearly $1.6 trillion, which is roughly this fiscal year's budget deficit. In other words, if the government could sell the above assets over the course of a year without impairing their (estimated) market value, then it could operate with no spending cuts, no tax hikes, and no additional borrowing by the Treasury. Clearly, there is scope here for asset sales to ease the transition to a permanent budget solution.
Other Federal Government Assets
The major items listed above are very liquid, and we have fairly precise estimates of the market value of most of them. However, the government also owns hundreds of billions of dollars' worth of real estate and other items. For example, a Reason report quoted Peter Orszag, then the director of the Office of Management and Budget, estimating in 2010 that the federal government owned 14,000 buildings and structures that were "excess" and 55,000 that were "under- or not-utilized."9 The problem with appraising these properties is that the government doesn't even have good documentation on what they are.
A recent Heritage Foundation report details some other areas ripe for privatization:
The federal government currently owns and controls vast assets, including huge swaths of commercial land, especially in the West; power generation facilities; valuable portions of the electromagnetic spectrum; underutilized buildings; and financial assets. Given the federal government's huge debt, it makes sense to sell at least a portion of these assets, especially those that are currently generating revenue below market levels (in which case the sale value would be above the present value of the current income on the assets). Sales of assets would immediately reduce the government's operating deficit and debt, reducing future interest costs.
Unfortunately, the plan does not itemize the assets, making it impossible to extract the estimates for the items that are not already included in the compilation above.
The Timing of Asset Sales
In a letter to Congressional leaders in which he urged a quick increase in the debt ceiling, Treasury Secretary Geithner rejected asset sales as a way to ease the budget crunch:
Treasury has been asked whether it would be possible for the Treasury to sell financial assets as a way to avoid or delay congressional action to raise the debt limit. This is not a viable option. To attempt a "fire sale" of financial assets in an effort to buy time for Congress to act would be damaging to financial markets and the economy and would undermine confidence in the United States.
Regarding gold, it is not clear how its sale would "undercut confidence in the United States both here and abroad." The dollar has not been linked to gold since 1971, and (at least before the crisis) very few people entertained the idea that the peg would be re-established anytime soon. If it were part of a plan to avoid increasing the debt limit (while maintaining interest payments on existing debt), a sell-off of its gold holdings might actually reassure investors that the U.S. government was finally getting serious about its finances.
Geithner's other main objection—that a "fire sale" would be costly for the taxpayer—is more plausible. Basic economics suggests that when an item is dumped on the market, its price drops. Wouldn't a large-scale liquidation of the government's assets, therefore, be self-defeating?
There is undoubtedly some truth in this view, but in the present circumstances, there are offsetting factors. For example, if the government began selling large quantities of the Strategic Petroleum Reserve, those barrels would not necessarily be channeled into refineries. Instead, the government could simply transfer ownership of the inventory, so that the "supply" of oil on the spot market wouldn't change.
For more on the interaction between spot and futures pricing in the decision to sell oil, see "Oil Prices," by Robert P. Murphy, April 7, 2008, Library of Economics and Liberty.
More interesting, Steven Landsburg pointed out that even if sales from the SPR did enter the spot market, they wouldn't have the full effect one might have originally supposed.12 This is because other producers, such as Saudi Arabia, could reduce current output to transfer more of their sales into the future (after the spurt from the SPR had subsided), where the spot price would likely be higher. In this scenario, regardless of the specific individuals buying the oil released from the SPR, the government would have effectively transferred its stockpile in salt caverns over to Saudi Arabian inventory buried in the ground, which the Saudis would have "paid for" by lower current revenues.13
More generally, the U.S. government is going to raise cash from the private sector one way or another. That is, the government is planning to spend much more over the next few years than it will collect in tax receipts and other revenues. Secretary Geithner's solution is to issue more bonds from the Treasury in order to raise the cash to finance the deficit. Yet, rather than hand private capitalists IOUs in order to induce them to lend their cash, another approach is to hand private capitalists equity in crude oil, gold, real estate, and other assets currently owned by the government.
If we assume for the moment that the government's future spending decisions are set in stone, then its decision to sell, say, $500 billion in assets this year would translate exactly into a $500 billion smaller public debt. This, in turn, would mean that investors effectively received a $500 billion tax cut, as their future tax burdens would be that much lower (because they would be financing a smaller government debt). This reasoning doesn't guarantee that prices for the particular assets would stay constant—after all, investors might not want to spend their windfall $500 billion by purchasing electromagnetic spectrum or D.C. office space—but it reinforces the earlier idea that the government has different methods of financing its cashflow deficits: It can either issue more liabilities or reduce its existing assets.
Finally, even if it were true that dumping the mortgage-backed securities and other financial assets would crash prices and thereby cause harm in the private sector, then Geithner is admitting that the government is currently keeping the prices for these items at artificial, above-market levels. Prices mean something in a market economy. The government doesn't raise living standards per capita by using tax dollars to prop up particular asset prices.
For an alternative scenario, see "Why Default on U.S. Treasuries is Likely," by Jeffrey Rogers Hummel, August 3, 2009, Library of Economics and Liberty.
The federal government has at least $1.6 trillion in liquid assets. An aggressive program to sell a large portion of these holdings over the next few years, coupled with equally aggressive spending cuts, would allow the government to honor its existing interest payments without raising taxes or going deeper into debt. Even putting aside the current budget crisis, many economists would argue that the federal government really has no business owning hundreds of billions of dollars of corporate securities, crude oil, and real estate. These assets should be transferred back into the private sector, where they will be more efficiently channeled into productive uses.
EIA, "Impacts of Increased Access to Oil and Natural Gas Resources in the Lower 48 Federal Outer Continental Shelf," Annual Energy Outlook, 2009.
Joseph R. Mason, "The Economic Contribution of Increased Offshore Oil Exploration and Production to Regional and National Economics," February 2009, American Energy Alliance.
Anthony Randazzo and John Palatiello, "Knowing What You Own: An Efficient Government How-To Guide for Managing Federal Property Inventories,"Reason, June 29, 2010. PDF file.
Stuart M. Butler, Alison Acosta Fraser, and William W. Beach (eds.). "Saving the American Dream," The Heritage Foundation, page 33. PDF file.
See the Treasury's archive of "Secretary Geithner Sends Debt Limit Letter to Congress," April 4, 2011.
As the original draft of this article was being prepared for publication, on June 23 President Obama and other world leaders agreed to release 60 million barrels of oil from their strategic petroleum reserves, with 30 million barrels coming from the U.S, at the rate of 2 million barrels per day. See Obama's desperate SPR oil play, CNN Money. The market price of oil dropped more than four percent on the day of the announcement. If the price of oil were based solely on its production rate rather than the stock of oil, the United States could sell its entire holding in the SPR over the course of a year—726.5 million barrels divided by an extra 2 million bbs/day on the market—while depressing the price of oil by only four percent. To the extent that prices are based less on the production rate of oil and more on the total stock of oil, then the considerations in the text above become relevant: in that case, which is the likely case, we would expect changes in the SPR inventory made for fiscal reasons to be largely offset by private speculators accumulating inventory, and by other producers reducing current output.
*Robert P. Murphy is a Senior Fellow in Business and Economic Studies at Pacific Research Institute, and an economist with the Institute for Energy Research where he specializes in climate change economics. He is the author of The Politically Incorrect Guide to Capitalism (Regnery, 2007). For more articles by Robert P. Murphy, see the Archive.