Sell? You Bet Your Assets!


Massive federal budget deficits are still with us, dragging down the economy. Faced with the unpleasant alternatives of raising taxes or cutting government benefits, both the administration and Congress are looking more favorably on what was once considered a radical alternative: selling off government assets to generate revenue.

Unfortunately, this prospect has been greeted with a spate of news stories characterizing asset sales as "accounting gimmicks." Think-tank experts and administration dissidents are quoted as saying that asset sales are a short-term desperation move that would only make the long-term budget problem worse. Why should the government sell off a loan portfolio at, say 60 cents on the dollar, and give up a future stream of income? Why sell off the naval petroleum reserves and give up future oil sales at potentially higher prices?

At first blush, these appear to be reasonable objections. But they are off-base, for two important reasons. The first reason is that markets work.

If you hold a second mortgage and need cash, you can sell the note at a discount from its face value. As you recall from Econ 101, the present value of a stream of future payments is less than the nominal sum of those payments. The extent of the discount reflects, among other things, the probability that the future payments will not be made.

So when the feds put a portfolio of, say, student loans or Third World loans on the auction block, the bids will reflect investors' best estimate of the true present value of the portfolio. And if that is really what it's worth, then it is quite sensible for the government to take that money now and use it to pay off debt. This is not an accounting gimmick—it's the reality of the situation!

The second reason is even more fundamental. It is often argued that the government "ought to be run like a business." If it were, goes this argument, then it would not make sense to sell off income-generating assets such as Conrail or the government's Power Marketing Authorities. After all, the income those entities generate reduces the need for tax revenue.

The problem with this line of argument is what it ignores. As Nobel laureate James Buchanan and his colleagues from the public choice school of economics have spent several decades demonstrating, government does not and cannot be expected to run like a business. Basic management and policy decisions of government-run enterprises are nearly always made for a combination of business and political reasons—which is why nearly all government enterprises run at a loss. The rare exceptions, such as Conrail's recent profits, are just that—exceptions. Far from supporting the case for retaining such enterprises in government, these temporary profits make it all the more urgent to unload the enterprise now, before politics again gains the upper hand and leads to a resumption of losses.

Government has no business running railroads—or selling electricity or even delivering mail. These are commercial services that the free market can and does provide. Likewise, government is poorly suited to be acting as a banker, insurer, or landlord, all of which roles the feds are now heavily involved in playing. (See the Grace Commission's report.)

All over the world, governments are selling off assets in order to reduce their indebtedness and stanch the flow of losses (and the resulting drain on the taxpayers). Under Margaret Thatcher, the British government has sold off $10 billion in land and businesses so far and plans another billion over the next two years. The new French government of Jacques Chirac plans asset sales of over $40 billion. And the Japanese government is selling off Nippon Telephone, Japan Tobacco and Salt, Japan National Railways, and its minority stake in Japan Air Lines (over $100 billion). The explicit reason for doing so is to reduce the size and scope of government, reduce government debt, and spare future generations the prospect of having to cover politics-driven losses.

It is the United States, the erstwhile bastion of free markets, that is out of step with the worldwide privatization trend. Far from being an accounting gimmick, selling off assets is an essential element of restoring fiscal soundness and shrinking the federal deficit.