The Political Economy of Public Debt: Three Centuries of Theory and Evidence

331 Pages·2017·2.399 MB·English

by  Richard M. Salsman

The Political Economy of Public Debt
NEW THINKING IN POLITICAL ECONOMY

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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
© 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
9 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 1 78536 337 5 (cased)

ISBN 978 1 78536 338 2 (eBook)

Typeset by Servis Filmsetting Ltd, Stockport, Cheshire
Contents

List of figures vi

List of tables vii
Acknowledgments viii

Introduction 1

1 A brief history of public debt 12
2 Classical theories of public debt 30
3 Keynesian theories of public debt 94
4 Public choice and public debt 153
5 The limits of public debt 217
Conclusion 258

Appendix 263

References 264

Index 303

v
Figures

1.1 Public debt of the United Kingdom as a percentage of GDP,

1700–2015 18
1.2 Public interest expense of the United Kingdom as a percentage
of GDP, 1700–2015 18

1.3 Public spending of the United Kingdom as a percentage of

GDP, 1700–2015 19
1.4 Public debt of the United States as a percentage of GDP,
1800–2015 20
1.5 Public interest expense of the United States as a percentage of
GDP, 1800–2015 21
1.6 Public spending of the United States as a percentage of GDP,
1800–2015 22
1.7 Public debt of 22 OECD nations as a percentage of GDP,

1900–2011 22

1.8 Three projections of the US debt/GDP ratio (leverage),

2010–40 28

vi
Tables

1.1 G ross public debt as a percentage of GDP, 15 OECD nations,

1910–2010 23
1.2 P ublic spending as a percentage of GDP, 15 OECD nations,
1910–2010 24

1.3 T he paradox of profligacy: higher public debt leverage, yet

lower borrowing rates, G- 7 nations, 1980–2015 25
A.1 P ublic debt theorists classified as realists, pessimists, and
optimists 263

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-m ore demo-

cratic, 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 absorp-

tions 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.

1