The Political Economy of Public Debt NEW THINKING IN POLITICAL ECONOMY Series Editor: Peter J Boettke, George Mason University, USA New Thinking in Political Economy aims to encourage scholarship in the intersection of the disciplines of politics, philosophy and economics It has the ambitious purpose of reinvigorating political economy as a progressive force for understanding social and economic change The series is an important forum for the publication of new work analysing the social world from a multidisciplinary perspective With increased specialization (and professionalization) within universities, interdisciplinary work has become increasingly uncommon Indeed, during the 20th century, the process of disciplinary specialization reduced the intersection between economics, philosophy and politics and impoverished our understanding of society Modern economics in particular has become increasingly mathematical and largely ignores the role of institutions and the contribution of moral philosophy and politics New Thinking in Political Economy will stimulate new work that combines technical knowledge provided by the ‘dismal science’ and the wisdom gleaned from the serious study of the ‘worldly philosophy’ The series will reinvigorate our understanding of the social world by encouraging a multidisciplinary approach to the challenges confronting society in the new century Titles in the series include: Sweden and the Revival of the Capitalist Welfare State Andreas Bergh Competition, Coordination and Diversity From the Firm to Economic Integration Pascal Salin Culture and Economic Action Edited by Laura E Grube and Virgil Henry Storr Politics as a Peculiar Business Insights from a Theory of Entangled Political Economy Richard E Wagner Liberty and Equality in Political Economy From Locke versus Rousseau to the Present Nicholas Capaldi and Gordon Lloyd The International Monetary System and the Theory of Monetary Systems Pascal Salin Creative Destruction and the Sharing Economy Uber as Disruptive Innovation Henrique Schneider Digitalization, Immigration and the Welfare State Mårten Blix The Political Economy of Public Debt Three Centuries of Theory and Evidence Richard M Salsman The Political Economy of Public Debt Three Centuries of Theory and Evidence Richard M Salsman Assistant Professor, Program in Philosophy, Politics & Economics, Department of Political Science, Duke University, USA NEW THINKING IN POLITICAL ECONOMY Cheltenham, UK Northampton, MA, USA â Richard M Salsman 2017 All rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA UK Edward Elgar Publishing, Inc William Pratt House Dewey Court Northampton Massachusetts 01060 USA A catalogue record for this book is available from the British Library Library of Congress Control Number: 2016949925 This book is available electronically in the Economics subject collection DOI 10.4337/9781785363382 ISBN 978 78536 337 (cased) ISBN 978 78536 338 (eBook) Typeset by Servis Filmsetting Ltd, Stockport, Cheshire Contents List of figuresvi List of tablesvii Acknowledgmentsviii Introduction1 12 A brief history of public debt 30 Classical theories of public debt 94 Keynesian theories of public debt 153 Public choice and public debt 217 The limits of public debt Conclusion258 Appendix263 References264 Index303 v Figures 1.1 Public debt of the United Kingdom as a percentage of GDP, 1700–201518 1.2 Public interest expense of the United Kingdom as a percentage 18 of GDP, 1700–2015 1.3 Public spending of the United Kingdom as a percentage of 19 GDP, 1700–2015 1.4 Public debt of the United States as a percentage of GDP, 1800–201520 1.5 Public interest expense of the United States as a percentage of 21 GDP, 1800–2015 1.6 Public spending of the United States as a percentage of GDP, 1800–201522 1.7 Public debt of 22 OECD nations as a percentage of GDP, 1900–201122 1.8 Three projections of the US debt/GDP ratio (leverage), 2010–4028 vi Tables 1.1 Gross public debt as a percentage of GDP, 15 OECD nations, 1910–201023 1.2 Public spending as a percentage of GDP, 15 OECD nations, 1910–201024 1.3 The paradox of profligacy: higher public debt leverage, yet 25 lower borrowing rates, G-­7 nations, 1980–2015 A.1 Public debt theorists classified as realists, pessimists, and optimists263 vii Acknowledgments The author acknowledges Michael Munger for being an invaluable mentor and the model of a collegial, productive scholar, the late John David Lewis for blazing a path I’ve since happily traversed, and Lisa Lynn Principe for her loving and loyal support My sincerest appreciation extends also to John Allison, Carl Barney, and Yaron Brook for their invaluable support of me professionally Additionally, I am very grateful to Geoffrey Brennan, William Keech, John Aldrich, Thomas Spragens, Richard Wagner, Peter Boettke, and Richard Sylla for their valuable input and counsel on this project Finally, I thank Alan Sturmer, Karissa Venne, and Sarah Brown at Edward Elgar Publishing for their terrific skill and utmost professionalism I’m proud of what I’ve accomplished here, yet I’m also solely responsible for any errors or oddities that might still remain viii Introduction This work examines three centuries of the most prominent political-­ economic theories of public debt, to help illuminate various causes and consequences of the unprecedented expansion of such debt over the past decade and – as is probable – for decades to come I consult and ­interrogate not only specialists in public debt but also the most influential minds of political economy in modern history, from Hume and Smith in the ­eighteenth century to Ricardo and Marx in the nineteenth century, to Keynes and Buchanan in the twentieth century That public debt has undergone “unprecedented expansion” of late reflects two facts First, until recently, public debts were typically incurred during wartime, not in peacetime Second, unlike today, large debt burdens in the past were usually felt most by less developed nations, not advanced or industrialized nations Evidence is abundant that these new patterns are attributable largely to the spread of ever-­more democratic, fiscally profligate welfare states that expand social insurance and pension schemes without overtaxing voting majorities,1 and also to state ­guarantees of fragile financial sectors,2 which promote excessive ­risk-­taking (“moral hazard”) while necessitating periodic public absorptions of defaulted private debts.3 Equally unprecedented (and reckless) is the recent adoption of zero or negative interest rate policies by major central banks, which help highly leveraged sovereigns borrow at ­artificially low rates, and enable still more public borrowing and ever-­rising rates of public leverage The great American statesman and finance minister Alexander Hamilton (1795) was the first to identify the relationship between unrestrained democracy (with purely “popular” instead of constitutional government) and unmitigated growth in public debt: [There is a] danger to every Government from the progressive accumulation of Debt A tendency to it is perhaps the natural disease of all Governments and it is not easy to conceive anything more likely than this to lead to great and convulsive revolutions of Empire. .  There is a general propensity in those who administer the affairs of a government, founded in the Constitution of man, to shift off the burden from the present to a future day; a propensity which may be expected to be strong in proportion as the form of the State is popular 308 The political economy of public debt rejecting analogizing of public and private debt 128 Harris, S.E 94, 123, 141–3, 147, 263 Hayek, F 119 Hemingway (The Sun Also Rises) 223 Hitler, A 105, 118–19 Hume, D belief that government should live within its means 30 comparison with Steuart 45–9 vs Hamilton 64 hostility towards financiers 40, 46, 87 as influential mind of political economy mistaken prediction of national catastrophe 85 vs Mortimer 51–2 on public debt 31, 37–44 as public debt pessimist 4, 37, 45, 90, 263 public spending as consumptive 82 Say echoing view of 76–7 Smith echoing view of 55 ideology 6–7, 9, 143, 260 Industrial Revolution 15 inequality of income and wealth 144–5 inflation 1990s decline, in US 151 acceptance as viable policy option 210 bias towards high 227 and Buchanan 192–3, 199, 202, 205–10, 222, 241 central banks’ relation to inflation 250–52 as “clear and present danger to free society” 97 as commonly used to reduce leverage 242 as destructive and generated by sovereign-sponsored central banks 241–2 excess of total demand causing 82 expectations in 1970s 27, 144 and Hansen 124, 128–9, 132–3 as harming creditors 76 helping debtors at expense of creditors 255 helping to mitigate leverage 229 and implicit default 56, 76, 132–3, 148, 207, 238–40, 247 and indexed bonds 241 and Keynes 105–11, 113, 115, 124, 145–6, 172, 207, 239 and Lerner 133–9, 219–20 and Lutz 163, 169, 172, 174, 178–81 and Mises 184, 189 in political economy literature 239–40 power to erode public debt 207–8, 235 and “pretended payments” 52 public debt as “inevitably leading to” 127 and Roosevelt 143 and sovereign borrowing 221 sovereigns as source of 255 United Kingdom suffering 81 as way of states repudiating debts 8, 160 inflationary finance 13, 27, 78, 105, 109, 129, 133, 147–9, 207–8, 227, 238–41, 245–6, 249–50 infrastructure and classical theorists 30, 64, 76 fostering long-term prosperity through and Keynesian theorists 96, 99–101, 103, 115–16, 120, 133 optimist and realist views on provision of 4, 259–60 and public choice theorists 158, 167, 175, 184, 187, 192, 213 and Reinhart and Rogoff 233 and sustainability of public debt 217 insolvency 4, 42, 45, 48, 64, 78, 232 interest rate policies 1, 3, 25, 111, 223, 252–3 interest rates 1980s debate on 149 Buchanan on 194, 201 and debt overhang 233 effect of artificially low public bond 253 efforts of central banks 3, 124, 151, 246, 251 and government deficit spending 204 Hansen on 130 Index ­309 Harris on 142 hypothesis of economic stagnation resulting from 233 inflationary money printing as way to reduce 118 Keynes on 109, 111–13, 116, 139, 147, 239 Lerner on 135 Lutz on 174–5, 180 Mill on 84–5, 157 non-linear response to debt 232 and paradox of public profligacy 247–8 Say on 76–7 and sovereign debtors 15, 249 Steuart on 46–7 of United Kingdom in wartime 47 in United States 20, 246 see also yields; zero interest rate policy (“ZIRP”) interventionist states 9, 156 investment Adams on 95 Buchanan on 201–2 Clark on 139 De Viti De Marco on 158–9 and democracies 255 Dietzel on 117, 167 Hansen on 124–5, 129, 132, 171, 183 Keynes on 96, 111–12, 115–17, 119–22, 125, 129, 133, 137, 147 Keynesians on 126–7 Lerner on 134, 137–8 low government yields implying safe 75 Lutz on 172, 174, 178 Mises on 184–7, 190 Pigou on 99–103 Piketty on 144 productive 85, 150, 158 secular stagnation due to deficient 126 socialization of 115, 117, 119, 122, 124, 137, 139, 162, 187 Steuart on 46 unemployment as reflecting insufficient 96 Wright on 221 ZIRPs as not encouraging 253 Japan adoption of “unorthodox” policies 138 central banks established in 26, 146 policy 27 debt overhang in 233–4 economic stagnation in 220, 234 fast-rising public leverage and aging populace 211 gross public debt as percentage of GDP 21, 23, 220 intensification of deficit spending 174 Krugman’s advice to 144 as not in good fiscal shape 258 possibly most overpriced public debts 248 public spending as percentage of GDP 24–5 stimulus and stagnation zero interest rate policies in 253 Jefferson, T as against all debt 58, 70–71 as against public debt 73–5 anti-capitalistic approach 70 as anti-Federalist 58 as Francophile and physiocrat 70 vs Hamilton 32, 58, 70–75 on inheritance 72, 104 on public bonds 72–3 as public debt pessimist 32, 90, 263 seeing debt as crucial to national defense 71 thought, as similar to Keynes 109 Jeffersonian system 252 Jevons, W.S 32, 92 Joines, D.H 229 justice absolute 155 acme of 165 answering the calls of 63 and bondholders 59 courts of 4, 217, 260 injustice 56, 101, 107, 109, 254 intergenerational 210 Rawlsian conception of 151 social 156, 254 society’s prevailing conception of 215 310 The political economy of public debt of state, confidence in 53 vigorous administration of 67 Keynes, J.M on achieving long-term economic stability 119–20 as anti-capitalist 9, 106, 110–12, 124 assessments of 121–4 attitude towards national debt 120 calling for “euthanasia of rentier class” 9, 90, 108–12, 115, 147, 162, 239 as critic of gold standard 147, 206–7 critics of 163, 184, 188, 190, 208 on currency debasers 109–10 deficit spending as advocating peacetime 112–14, 133 characterized as “desperate expedient” 117 as discomfited by 147 distinction between ordinary and capital spending 116–17 little written on 104, 114–15 as never counselling unmitigated 119 power to “stimulate” an economy without causing fiscal ruin 97 on public capital goods 125 reputation for being cavalier about 115–16, 121 reserved for investment in public capital 129 as stimulating output 139 and demands for German reparation 104–5, 107, 110, 147 echoing theme that financial liberty breeds political tyranny 40 favoring fiat money 9, 199 and inflation 105–11, 113, 115, 124, 145–6, 172, 207, 239 as influenced by Malthus 82 as influential mind of political economy and integrity of contract 108–9 intellectual roots 118–19 on intersovereign debts 106–7 Lerner’s view of, as timid 134, 137 logic of, as driving policymaking 112 medievalist bigotry 108–9, 111, 124 and “multiplier” effect 147 as overturning “old time fiscal religion” 96–7 Pigou under influence of 101 used as theatrical foil to 98–9 policies for full employment 116 proponent of zero interest rates 9, 147 on public debt 96, 104, 108, 114–15, 142, 146, 151, 213, 239 as public debt optimist 4, 96, 263 as public debt realist 121 rejecting “crowding out” notion when saving is excessive 113 rejection of Say’s Law 82 on theory of output 119, 184 visit stoking interest in new American policy 141 war curing economic depression 140 wartime financial schemes vindicating 143 Keynesian spending multiplier 103, 113, 136–7, 140, 147, 164, 203, 221 Keynesian theories consolidation of pre-Keynesian views 94–8 critics of 153, 162, 165, 169, 176, 181, 186–8, 190, 192–209 demand-side and supply-side together 146–51 Depression and new Malthusianism 104–23 dissidents 139–41 functional finance and “anything goes” concept 133–8 maturation of 141–3 public debt theory 141–2, 151, 193–209, 213, 248 road to fiscal perdition 143–6 stagnation and case for perpetual debt growth 123–33 World War I, large debts and revisionist theory 98–104 Krugman, P 9, 90, 94, 123, 134, 140, 144, 263 labor theory of value 32, 79–80, 86–7 Laffer, A 149, 163, 263 Laffer Curve 150, 217–18 Index ­311 Laffer Debt Curve 217, 228–9 laissez-faire America’s populist-progressive era away from 33 mercantilism in contrast to 45 output produced under conditions of 119 legal tender 109, 170, 180, 250, 254 Lerner, A critics of 142, 148, 164, 172, 181, 221 and functional finance 133–8, 144, 147, 219–20 and inflation 133–9, 219–20 making case for public profligacy 94, 134, 147, 219 as prominent Keynesian 123, 134 on public debt 132–3, 135–8, 219–20 as public debt optimist 4, 263 rejecting fixed principles of public finance 134 unrestrained, rules-free approach 133, 151 waning influence 138 Leviathan state 184, 191, 203, 205, 211, 224–5 see also autocracy; dictatorship liberty 8, 30, 62, 64, 74, 83, 95, 110, 153–4, 184–5, 196, 210 limits to growth see secular stagnation “loan expenditure” 104, 113–16, 124 loanable funds 46, 76–7, 111 Lockean thought London School of Economics 134 Louisiana Purchase (US) 73 Luther, M 13 Lutz, H.L anticipating principle of “fiscal illusion” 165–6 career 162–3 immortal words of 202 on inflation 163, 169, 172, 174, 178–81 on Keynes’ new economics 163–5 main beliefs and criticisms 163, 228 on main threat to fiscal balance 165 as precursor of public choice approach 155 on public debt 164–81, 194, 218, 252 as public debt realist 163, 166, 169, 263 Macaulay, T.B 90–92, 263 Malthus, T.R 32, 52, 82, 84, 90, 118, 263 Malthusian thought 118, 192 Malthusianism (new) 96, 104–23 marginal revolution 32 marginal utility theory 92, 134, 158 “market failure” 4, 26, 146, 154, 227, 250 Marshall, A 92 Marx, K belief that economic class determines ideology and politics 83 as believer in labor theory of value 86 echoing view of Hume 40 forecasting collapse of capitalism 125–6 as influential mind of political economy Keynes echoing view of 106, 109 non-adoption of Hamilton’s realism 75 prejudice against rentiers 14, 31 on public debt anti-capitalist 31, 79 as anti-progressive reactionary 86–90 Ricardo’s direct influence on 80 as public debt pessimist 90, 145, 263 and state-centric monetary system 146 Marxian debt analysis 53 McCulloch, J.R 31, 52, 85–6, 90, 263 Meade, J.E 123, 131–2 Medieval era 12–14, 49 Melon, J.-F 32–4, 52, 76, 79, 90, 263 Menger, C 32, 92 mercantilism 14, 35, 45–6, 48–51, 55, 92, 95–6, 118, 124, 160, 202 Mill, J.S belief that government should live within its means 30 De Viti De Marco echoing view of 157 and debt Laffer curve 229 on public debt 31, 52, 84–5, 248 as public debt pessimist 90, 263 on usury 13 312 The political economy of public debt Mises, L von 155, 181, 184–90, 202–3, 228, 263 monarchy 36, 38, 83 money (and coinage) see fiat paper money; gold-based money; gold standard money illusion 202–3 Montesquieu, C 31, 34–7, 90, 263 “moral hazard” 1, 76, 236–7 Mortimer, T 45, 51–2, 90, 263 Moulton, H 181–4, 205, 263 Mundell, R.A 144, 149, 163, 263 Munger, M.C 212–13 Musgrave, R.A 94, 120, 123, 143, 147, 263 Mussolini 119, 155 Napoleonic Wars 17, 19, 31, 37, 52–3, 73, 75–6, 78–9, 81, 98, 127, 253 national defense 4, 64, 71, 167, 217, 260 national income (GDP) as accessible source of funds for public debt service 234 Dietzel on 118 Hansen on 127–8, 130–32, 137, 182–3 Harris on 142 Hume’s thoughts on increasing 40–41 Keynes on 108–9, 114, 120, 147, 239 Lerner on 136–7, 172 Lutz on 164–5, 172, 175 Mises on 188 Moulton on 183 public debt for major nations relative to 17–25 and public debt/GDP 231–2, 234 and public leverage 197, 218–19, 222, 229 as theoretical base of public debt capacity 160 of United Kingdom Hamilton’s thoughts on 78 Hansen’s thoughts on 127 Williams on 141 neoclassical theories 32–3, 90–92 Netherlands beginning of public borrowing 15 central banks established in 26 in debt 52–3 early political system 31 gross public debt as percentage of GDP 23 public spending as percentage of GDP 24 United Provinces 31, 52 “New Classical” economics 143–4, 149, 153, 202–3, 213, 226, 241–2, 248 “New Deal” (US) 125–6, 140 obligations bonds and entitlements as 218 and claims 194, 197, 236 England meeting 91 of future generations 32, 194 German’s capacity to meet foreign 104 government 99, 108, 136, 169–70, 172, 176, 178 impact of defaults of 209, 222 incurred during American Revolution 58 Keynes’ call for cancellation of 106 lower-interest-bearing sovereign 247 non-interest-bearing 108 of plighted faith 91 sinking funds to ensure repayment of 31, 79 “odious debt” 31, 43, 208 OECD nations public debt of 21–4 public spending of 24–5 organization of debt into currency 16, 81–2, 146 “original sin” 147–8, 245–6 over-production see gluts overhangs 223–35 “Palmerston Doctrine” (UK) 210 “paradox of profligacy” 25, 247–9 “paradox of thrift” 96–8 Paris Peace Conference (1919) 104 “passive debt” 129 Peel, R 52 “perfect competition” model 154 Phillips curve 144 Pigou, A.C 98–103, 106, 263 Index ­313 Piketty, T 9, 40, 90, 130, 134, 144–6, 263 Pinto, I de 32, 45, 49–52, 54, 90, 263 political dependents, central banks as 249–52 political regime types 6–7, 226–7 political theories 8, 150, 191, 195, 202, 258 populist-progressive era 33, 143 posterity (future generations) after 1688 Revolution 44 Buchanan on 131–2, 193–6, 198 De Viti De Marco on 158 governments as prone to “mortgaging” 39 Hamilton on 58, 64–7 Hansen on 132–3 Harris on 142 Jefferson on 72–3 Keynes on 198 Keynesians on 153 Mises on 187 Pigou on 100–102 public borrowing as burdening 39 public debt as harming 202, 212–13 and Ricardian equivalence theorem 31, 158 Ricardo on 81 Steuart on 47 Postlethwayt, M 45, 58, 263 private debt and public debt, analogy between 6, 128, 130–33, 135, 168–9, 193, 196–200, 221, 247–8 profligacy fiscal 139, 150, 154, 190, 217, 254, 256 public 9, 83, 94, 140, 154, 182, 184, 247 see also “paradox of profligacy” progressives 95–6 property (private) 8–9, 110, 211 property rights 7, 9, 110, 163, 211, 214, 227–8 prosperity accumulation of debt spurring 41 Buchanan on 131, 210 and central bank independence 250–51 claim that public debts deduct from 45 direct democracy suboptimal for 255 economic 8–9 financial revolution causing growth in 30 government loans as cause of 71 governments borrowing to foster Hamilton on 61, 64–5 Harris on 142 Keynes on 107, 111–14 large debt build-ups followed by 85, 95–6 Lerner on 138 Lutz on 164, 168 Mises on 184 Moulton on 182 national Gladstone on 86 Hume on 41 private capital bolstering 56 public credit as fatal to 76 schemes undermining “passive” creditor as crucial to 36–7 Pigou on 99 Piketty on 144–5 public debt holders as making 46 realist view of 260 requiring public frugality 55 resources drawn from private sector diminishing 31 Ricardo on 80 Smith’s views on 55–6 of state standing on precarious footing 47 and sustainability of public debt 217 Protestant Reformation 13 proto-Keynesians freespending 226 in Germany 117–18 Hamilton portrayed as 61, 64, 68 mercantilists typically cast as 49, 92 public bonds and autocracy 224 average duration of 72 becoming “unfunded” 17 Buchanan on 198, 209 and central banks 251–2 Clark on 140 current prevalence 260 De Viti De Marco on 157, 159 and debt Laffer curve 229 314 The political economy of public debt effect of purchasing power of money 238 escrow-type fund used to purchase undervalued 16 Hamilton on 63, 68, 77 Hansen on 129, 182 Hume’s hostility towards 40–41 inflation-indexed governments issuing 13 reasons for issuing 240–41 Lerner on 136, 138 Lutz on 175 Marx on 87, 89 Mill on 84 Mortimer on 51 and organization of debt into currency 81–2 Piketty on 145 plunging yields in popular and absolutist states 38 public debt gross, as all outstanding 231 and investors’ willingness and capacity to buy and hold and reserve currency demand 244 Ricardo on 81 Say on 77–8 Smith on 53 Steuart on 46 Wright on 221 yields 3, 27, 77, 223, 232, 247–8, 252–3 public capital investment see infrastructure public choice early suspicions of state motives 162–90 essence of 153–5 as focusing on causation of public debt 153 Hume adopting view of 39–40 important themes of 139–40 pessimism reprised 191–212 possible argument on paradox of profligacy 248 public debt as deferred taxation 31, 155–62, 194, 196, 203, 211, 213, 218, 224 recognizing influences of unrestrained democracy search for constitutional restraint 212–15 skepticism over claims about sovereigns 240 slow but steady ascendancy of 151 theorists influenced by 226–7 public choice theorists on achieving fiscal integrity 154 belief that public debt harms future generations 214 as focusing on causation of public debt 208 opposing Keynesian public debt theory 213–14 presumption that everyone is selfinterested 153, 215 prominent 153 rejecting Germanic-organic view of state 154 stressing both positive and normative aspects of public debt 214–15 tendency towards debt pessimism 8, 162, 168 Williams as proto 140 see also Brennan, G.; Buchanan, J.M.; De Viti De Marco, A.; Lutz, H.L.; Mises, L von; Moulton, H.; Wagner, R.E public credit Adams on 95, 166 as capacity to borrow 217 Clark on 139 De Viti De Marco on 160–61 definitions 5, 77 future of 255 Hamilton on 5, 10, 59–61, 63–4, 66–8, 70 Hansen on 127, 130–31 Hume on, in relation to UK 42–3 Hume’s essay on 37, 39, 51 Keynes on 104 Lerner on 172 Lutz on 163–8, 170, 174–7, 179, 218 Marx on 88–9 Mill’s index of 84 Mises on 185 Mortimer on 51–2 as public debt capacity 28, 160 Index ­315 relation to public debt 5–6, 8, 28, 175–6, 218 Say on 76–7 Smith on 53 as sound, in United States 15 Steuart on 46–8 public debt “active” versus “passive” 129 analogy with private debt 6, 128, 130–33, 135, 168–9, 193, 196–200, 221, 247–8 build-ups (accumulations) classical economists on 30, 41, 52, 84 De Viti De Marco on 162 electoral bias favoring 254 future likelihood of larger 255 Hamilton on 1–2, 5, 65–7, 75 Hansen advocating 129, 147, 181 interventionist states Keynes on 115, 124 Keynesian theorists on 143, 150, 205 Lerner advocating 147–8, 181 Lutz on 170 Moulton on 181 Munger on 212–13 norm since 1930 7–8 optimists on Pigou on 99–100 public choice theorists on 211, 212–13 studies of political-economic causes of 223, 228, 251 of UK and US 85, 90, 96 burden 1–4, 108, 111, 117–18, 123, 128, 146, 169, 179, 195–6, 206–7, 238 case for perpetual growth 123–33 and constitutionalism 30–33 crises 10, 144, 219, 228, 234–5, 244, 246–7 as “deadweight” 117, 120, 129, 131–2, 174 as deferred taxation 31, 155–62, 194, 196, 203, 211, 213, 218, 224 and dysfunctional finance 218–20 external/foreign-held 6, 48–9, 103, 135–6, 147, 149, 191, 193, 197, 199–201, 225, 231, 237–8, 247 extinguishment 32, 50, 52, 58, 63–7, 75, 78, 159–60 future of 254–6 gross 23–5, 159, 231 history finance in ancient and medieval times 12–14 financial revolution and Enlightenment 14–17 US debt sustainability 27–8 visual depictions 17–27 illusion 132, 139, 180, 202–3, 214 incidence 32, 90, 153, 191, 195, 198, 203, 213–14 internal/domestically-held 6, 45, 48–9, 55, 106, 108, 110, 126, 135–7, 142, 158–9, 173, 181–2, 191, 193–4, 197, 199–202, 219, 221, 225, 231, 247 intolerance 217, 231, 237 issuance 16, 45, 133, 193, 213, 248 limits capital levies, forced loans and financial repression 252–3 central banks as fiscal enablers and political dependents 249–52 debt defaults 235–42 and dysfunctional finance 218–20 exorbitant privilege and paradox of profligacy 242–9 literature on 217–18 metrics for debt sustainability and overhangs 220–35 management 124, 163 metrics 220–35 monetization 27, 81, 111, 144, 148–9, 151, 240, 250–51 neoclassical marginalization of 90–92 net 6, 73, 159, 176–7, 230 optimists 3–5, 62, 90, 103–4, 175, 218, 230, 247, 259–60, 263 optimization 217–18 overhangs 220–235 pessimists 3–5, 48, 62, 85–6, 90–91, 103, 145–6, 168–9, 185, 218, 230, 247–8, 259–60, 263 realists 4–5, 10, 37, 48, 90, 103, 129, 150, 259–60, 263 316 The political economy of public debt relief 236 repudiation Buchanan on 209, 222 De Viti De Marco on 160 as deliberate default 79 Hume on 37–8, 43, 47 Jefferson on 71, 74–5 Keynes on 104–5, 107–10, 133 Keynesians on 147 Lerner on 134 Lutz on 163, 166, 176, 178–9, 181 Mises on 189–90 by monetary debasement 256 Moulton on 183 pessimists’ advice 4, 259 Piketty on 145 reputable alternative to 242 state tendency 8, 31 Steuart on 47 theoretical framework 235–7 Tracy on 71 restructuring/renegotiation 63, 147, 166, 210, 217–18, 235–6, 242 spiral 174, 223 sustainability 27–8, 217, 220–35, 245 theory classical 30–92 future of 254–6 Keynesian 94–151 public choice 153–215 tripartite taxonomy of 128–9 “vulgar” view 48, 191, 200, 202 in wartime 3, 7–8, 14, 16–17, 19–21, 26–7, 32–4, 37–8, 51–4, 57–8, 60–62 public debt capacity see public credit public debt default explicit 4, 13, 27, 108, 145, 148, 176, 191–2, 209, 218, 222, 235–42, 259 implicit 13, 52, 56, 76, 108, 132, 178, 180, 192, 207, 236, 238–42, 246–7 partial 179, 181, 236–7 “serial defaulters” 71, 75, 207, 231, 236–8 public finance abandonment of rules of 151 as analogous to household finance 52 Buchanan on 210 causality due to imprudence, argument 8–9 central conflict of 95 De Viti De Marco on 155–6, 160, 162 financial revolution 14–17, 30 Hansen specializing in 123, 127 ideology influencing assessments of Keynes on 106, 199 Lerner on 134, 138 Lutz on 162–3, 173 McCulloch on 85 mercantilism as system of 14 Mises on 187, 190 Moulton on 182, 184 as operating best by objective standards 220 Pigou on 99, 101–2 public choice offering more consistent theory of 154, 208 public debt as derivative of 256 radical transformation of state-enabling system of Keynesian 149 summary of norms 96 public goods 6–7, 54, 64, 166–8, 202, 213–14, 217, 256 public leverage Buchanan on 197, 222–3 central banks helping to mitigate rising 241 concept of 160 and crises 247 debt Laffer curve of 217–18 decline in 37–8, 86, 98 explicit and contingent 218–19 Franzese on 228 future of 259 of Greece 246–7 Hansen on 127, 130–33, 183 historical methods of reducing 242 inflation reducing 238 at “insupportable level” 109 of Japan 24–5, 144, 233 Keynes on 120, 239 Keynesian theory on 143, 151 large economies with high 233–4 Index ­317 nations borrowing at unprecedented levels of 85 optimization 228–30 and partial default 236 peacetime boom in 211, 258 pessimist view of 259 and political regime types 226–7 potential causes of build-ups 255 ratios 3–5, 21, 94, 145, 148, 208, 234, 241 realist view of 4, 260 reasons for unchecked growth 232–3, 240 rising rates of 1, 24–5, 27, 115 sovereign bond yields as sign of safety 248 US, contemporary 97, 148 use of inflation to erode excessive 76 in wartime 21, 33, 92, 94, 100 public pensions 138, 145, 246, 253 public spending Buchanan on 131, 192–4, 196, 209, 222 as consumptive, never productive 82 De Viti De Marco on 158 deadweight losses of taxation from 226 devoted to public debt service future generations 133 in United Kingdom 42 and electorally sensitive representatives 2, 150, 254–5 Hamilton on 65 Hansen on 127 Keynes on 113, 115, 147 Lerner on 134, 138 Lutz on 164, 173–4, 177, 180 Mises on 184, 188 as percentage of GDP of OECD nations 24–5 of United Kingdom 19 of United States 22, 97 popular, democratic nations endorsing 75, 82 public borrowing disguising full cost of 253 and repudiation of debts and Ricardian equivalence theorem 80 Smith on 54 Tocqueville on 82–3 during wartime, in UK 99–100 Williams on 140–41 “pump priming” 118, 139 “quantitative easing” 27, 138, 144, 149, 151, 251 see also public debt; monetization redistribution 137, 145, 156, 159, 225, 255 regime type (political) 6, 36, 217, 226–7 Reinhart, C.M 220, 230–39, 242, 246–7, 253 Renaissance era 13–14, 16, 53 rentiers central banks as punishing 124 Clark on 140 De Viti De Marco on 159 democratic populism’s disdain of 232 Hansen on 130, 133, 138 Hume’s view of 40 and inflation 210 Keynes’ euthanasia of 9, 90, 108–12, 115, 147, 162, 239 Lutz on 174–5, 180 Marx’s dislike of 14, 86–7, 89 as parasitical 126 Piketty on 90, 144–6 prejudicial premise on 36, 40 “Republic” of 15, 260 revolutions fired by 14–15 and vote-getters 190 reparations 104–5, 107, 118–19, 146–7 republics and republicanism constitutionally limited commercial 15, 260 federal 164 regime 210–11, 217, 220 debts contracted by 34 enacting more tax-rate cuts but not spending cuts 188 imposition of tax burdens 39 Italian 15, 52–3 vs monarchical governments 38, 52–3, 83 Montesquieu on 36 United States moving towards 261 318 The political economy of public debt reserve currency and exorbitant privilege 242–7 US dollar as 26–7, 245 revisionist theory 98–104 “Ricardian equivalence” 31, 80–81, 158, 191, 213–14 Ricardian socialism 80 Ricardo, D belief in labour theory of value 79–80 belief that government should live within its means 30 De Viti De Marco echoing view of 158, 161 denial of debt illusion 202 equivalence doctrine 80–81 “fiscal illusion” 81 as influential mind of political economy Keynes echoing view of 106 Lutz echoing view of 173 McCulloch echoing view of 85 mistaken prediction of national catastrophe 85 Piketty echoing view of 145 on public debt as broadly detrimental 84 non-productive dissipation of wealth 52, 166–7 opposed to excessive use of 31 “organization of debt into currency” 81–2 and war 32, 79, 82, 253 as public debt pessimist 78–80, 90, 263 public spending as consumptive 82 on usury 13 rights of citizens 217 creditors’ 61, 63, 75, 111, 208 of individuals 110–11, 220 property 7, 9, 110, 163, 211, 214, 227–8 as respected, in republics 15 respecting state 64, 162 state, to breach credit 37 of the whole 72 Rogoff, K.S 220, 231–9, 246–7 Roosevelt, F.D 114, 118, 140–41, 143, 182 rule of law 12, 36, 83, 162, 164, 254 “safety net” 217, 231 Samuelson, P 94, 123, 143, 148, 263 savings Buchanan on 194, 196–7, 200, 202, 224–5 constitutionally limited governments as fostering 165 De Viti De Marco on 157, 160–61, 248 and deficit spending 30–31, 96 and expansion of debt 126–7 financiers as fostering 87 Hamilton on 58, 60 Hansen on 123–5, 132 Keynes on 96, 112, 116, 121, 123–5 Lerner on 132, 137 Lutz on 168, 170–71, 173 Mill on 84, 157 Piketty on 145 public debt as crowding out private 230, 248 public loans as wasting 82 Ricardo on 79 Say on 76–7 secular stagnation due to excessive 126 Smith on 55 usury defended as 30 Say, J.-B belief that government should live within its means 30 “crowding out” argument 76–7 and debt Laffer curve 229 on dissipation of wealth 52 on government spending 76–7 and labor theory of value 32 on national bankruptcy 78 opposed to excessive use of public debt 31 on public borrowing 76–7, 166–7 on public debt as detrimental 76, 84 as public debt pessimist 75, 77–8, 90, 263 public spending as consumptive 82 on sinking funds 77 on usury 13 Say’s Law 82 secular stagnation critics of thesis 131, 142, 181 Index ­319 as due to excessive savings and deficient investment 126 governments as providing means of mitigating Hansen’s thesis of 125–8, 183 Japan’s 144, 234 and permanent deficit spending 96 view that deficit finance can cure 126, 133 and zero interest rates 252 see also stagnation (economic) securities in ancient and medieval times 12 average duration of 212 and central banks 249–50 in financial revolution era 15, 30 as gradually transformed into cash equivalents 254 Hamilton on 66 Hume on 39–40 Keynesians on 197 Marx on 87–8 mortgage-backed 248 Mortimer on 51 Piketty on 145 Ricardo on 79 sovereign 243 Steuart on 47 US debt 245 see also public bonds seigniorage 240 self-interest Buchanan on 208–10, 222 of central banks 243 of citizens 209, 222 of creditors 33, 84, 248 De Viti De Marco on 161 of elected officials 213 individual 213 Keynes on 110–11 private actors and political elites driven by 215 of public bondholders 56 public choice theorists on 153–4, 215 rational 208 realist view of 154 of savers 177 sovereigns best modeled as 226–7 states foreswearing repudiation 237 virtues of 30 Seven Years War 57 Shylock 174 sinking funds extinguishment via 32 Hamilton on 59 Mortimer on 51 as prudent method of debt service 46 Ricardo on 79 Say on 77 Smith on 52–3 United Kingdom use of 47, 79 Walpole creating first fund in 36 use by US federal government 16–17 use in peacetime 16, 31 slavery see “debt slavery” Smith, A belief that government should live within its means 30 vs Hamilton 64 as influential mind of political economy vs Keynes 107, 109, 239 Lutz echoing views of 180 and mercantilism 45 mistaken prediction of national catastrophe 85 opposed to excessive use of public debt 31 on public borrowing 166–7 on public debt 52–7, 84, 239 as public debt pessimist 4, 52, 90, 263 public spending as consumptive 82 Say echoing views of 76–8 on usury 13 social insurance 1, 4, 7, 187, 259–60 “social utility” 134 socialism 9, 80, 119, 124, 134, 145, 162 “socialization of investment” 115, 117, 119, 122, 124, 137, 139, 162, 187 “soft despotism” 83, 188 sovereign debt see public debt sovereign immunity 128, 169, 193, 199, 210, 219 speculation 34, 64, 81, 89, 100, 138 “stagflation” 138, 150–51, 153 stagnation (economic) commercial, public debt counteracting 46 320 The political economy of public debt complete policy discretion breeding 134 and high public debt/GDP ratios 233–4 partial, indefinite deficit spending not a remedy for 139 perpetual, public leverage ratios bringing 4, 247 persistent, and stimulus Piketty’s belief that inequality breeds 145 prolonged highly leveraged sovereigns enacting policies causing 261 resulting from debt overhangs 235 public debt promoting shift to 185 and saving and investment 112 spread and persistence of 255 see also secular stagnation Stalin 119 state motives 162–90 statism 118, 163–4, 205, 254 Steuart, J on Davenant 33 as influential mercantilist theorist 45–6 on public bonds 46, 58 on public debt 32, 45–50, 64 as public debt realist 4, 90, 263 and sinking funds 46–7, 49–50 suffrage (franchise) 15–16, 83, 143, 146 supply-side economics 146–51 sustainability see debt sustainability tax burden of bonds and entitlements 218 Brennan on 211 Buchanan on 203 De Viti De Marco on 159 electorally sensitive representatives resisting 254 Hansen on 125 Hume on 41 Lutz on 174, 177 McCulloch on 85 Meade on 131 of nineteenth century private sector 249 republics usually imposing light 39 Ricardo on 79 Smith on 55 Steuart on 48 Wagner on 212 “tax smoothing” 99, 223, 228 taxable capacity and 10 percent income tax rate 78 and calculation of public debt/GDP ratios 255 De Viti De Marco on 160–61 democracies with greater 83 Hamilton supplying metrics for calculating 61 Hansen on 127, 129 Joines on 229 Lerner on 136 Lutz on 170, 176 realist view of 4, 260 Reinhart and Rogoff studies ignoring 234, 246 United Kingdom’s 99 taxation Buchanan on 192–4, 203, 205, 209, 222 center-left politicians keen to raise 150 De Viti De Marco on 156–7, 160, 248 deadweight losses of 226 electorally sensitive representatives resisting 255 Gilbert on 126 governments in wartime 32 Greenspan on 204 Hamilton on 10, 60, 65, 67 Hansen on 129, 131, 183 Jefferson on 75 Keynes on 107, 113–14 Lerner on 136 Lutz on 163–4, 166–7, 173, 177, 180–81, 194 Marx on 89 McCulloch on 85 Mises on 189 Moulton on 183 opposed by declarers of independence 62 pessimist view of 259 Pigou on 99 Piketty on 145 political elites’ electoral incentive to minimize Index ­321 public debt as handmaiden of 167 as minimizing scope of 46 as preferable to oppressive 32 Ricardo on 78–9, 82 see also deferred taxation, public debt as taxpayers avenue for future research 255–6 Buchanan on 194, 197–8, 209, 222 in central conflict of public finance 95 Clark on 140 De Viti De Marco on 157, 159–60 Hansen on 132, 173 Keynes on 108, 198 Lerner on 137 Lutz on 168, 173–4 Mises on 184, 186–7 Pigou on 100 popular state reliant on acquiescence of 38 revolutions fired by 15 Tocqueville, A de on democracy 2, 31, 82–3, 188 opposing excessive use of public debt 31 as public debt pessimist 90, 263 “Too Big to Fail” doctrine (US) 217, 231, 248 “tragedy of the commons” 211–12 see also fiscal commons transfers analogy 72 Buchanan on 193–4, 200, 209, 222 Dietzel on 118 as generating high taxes 227 Hansen on 129, 133 intergenerational 193, 228 Keynes on 96, 115–16, 129 Lerner on 134 Lutz on 175 Mises on 187 non-remunerative 175 Pigou on 101–2 redistributive 104 social 99, 133, 184 wealth, in medieval era 14 “Treasury View” (UK) 102, 112–13 unemployment Buchanan on 192 Griffith on Hansen on 127, 129–30, 132 involuntary 99, 115–16, 119, 133 Keynes on 96, 115–16, 119–20, 122, 133 Lerner on 135 Lutz on 165, 168, 171 Malthus on 82 Moulton on 183 Pigou on 99, 101, 103 progressives on 96 public debt theorists on 213 Williams on 141 United Kingdom (UK) history 26, 30–31, 33–4, 37–8, 41–9, 51–2, 56–7 as prudent fiscal role model 31 public debt 17–18, 23, 25 public interest expense 17–19 public spending 19, 24 United States (US) Civil War 20, 75–6, 90, 103 debt projections 27–8 history 58–75 public debt 19–20, 23, 25 public interest expense 20–21 public spending 21–2, 24 US Congress 58–60, 62, 64–8, 74, 232 US Constitution 59, 62, 71, 73, 165, 205, 208, 261 US Treasury 3, 16–17, 20, 25, 58, 61, 71, 130, 140, 178–9, 181, 227, 230, 232–3, 241, 244, 253 usury/usurers 13, 30, 89, 109, 190, 208 Victorian era 86, 96–8, 208 “vote motive” (electoral incentives) 8, 205 Wagner, A 117–18, 195 Wagner, R.E 96–7, 121, 153, 162, 190–91, 205–7, 211–12, 250, 263 Walpole, R 36 Walras, L 32, 92 Webb, B 118 Webb, S 118 welfare state Bismarck’s German 33 322 The political economy of public debt central banks founded to assist 146 electorally sensitive politicians wanting 261 fiscal manifestations of burgeoning 218 and fiscal profligacy 150, 182 and “Great Society” programs 148 Greenspan on 204 literature on unsustainability of 260–61 making seem less costly than it is 253 Moulton favoring 182 Piketty favoring 145 relation to public debt 7, 28, 215 and unfunded future contingent liabilities 231 in United Kingdom 19 William III 26, 47 Williams, J.H 139–41, 263 World War I 17, 19–21, 26, 33, 37, 48, 78, 92, 94, 97–100, 104–6, 113, 127, 146, 173, 178, 184, 218, 244–5, 253 World War II 3, 17, 19–21, 97–8, 100, 127, 130, 142, 148–50, 163, 178, 181, 204, 211, 232, 239, 253, 258 Wright, D.M 181–2, 220–21, 263 yield spread 249 yields Buchanan on 209–10 decline in, among developed nations efforts of central banks 247, 251–3, 258–9 and financial repression 149, 253 inflation-indexed bonds vs unindexed bonds 240 with larger increases in supply 244 Lutz on 174–5, 181 Mill on 85, 229 paradox of declining, amid rising public leverage 232, 244 pessimists on 247–8 public bonds 3, 27, 77, 223, 232, 247–8, 252–3 remaining low, while bond prices remain high 232 remaining low, while debt accumulates 48, 97 Say on 77, 229 as signalling safety of public leverage 248 ten-year sovereign bond 25 see also interest rates zero interest rate policy (“ZIRP”) 1, 3, 9, 25, 27, 109, 111–12, 138, 144, 147, 151, 223, 239, 247, 251–3, 259 ... State Mårten Blix The Political Economy of Public Debt Three Centuries of Theory and Evidence Richard M Salsman The Political Economy of Public Debt Three Centuries of Theory and Evidence Richard... consequences: The political economy of public debt ●● ●● ●● questions as to the nature of public credit and debt, including: the ways of characterizing public credit and public debt, and whether the two... gross debt versus net debt, and whether a lower net debt entails less of a burden; national debt versus public debt (the sum of national plus state and local debt) and the implications of debt