Thursday, May 17, 2012

The Global Debt Crisis, IX: Is it Safe to Expand Public Debt?

Another issue addressed by Moulton was the question as to whether there were any circumstances under which the national debt could be gradually and safely expanded. Moulton conceded that there are two circumstances under which it would not necessarily be financial suicide to expand public debt. The first is where a large project needs to be undertaken for which financing does not exist in either the private or the public sector. The second is where the tax base is expanding and can support a greater amount of borrowing on the part of the government.

In the first instance, Moulton was very clear that the only time the government should go into debt to finance anything is if the project is expected to generate cash revenue sufficient to repay the cost of the project and thereafter cover its maintenance. In other words, as long as a project is expected to pay for itself out of future revenues, then the government can justify emitting bills of credit (the governmental form of bills of exchange) to pay for it.

Our response is to agree with Moulton — with a qualifier. The usual rationalization for having government undertake the financing (and thus ownership) of infrastructure such as bridges, roads, sewers, and so on, is that this sort of capital improvement is believed to be beyond the ability of the private sector to finance out of existing resources. It seems to have escaped the notice of the experts, however, that if the government needs to create money to finance the construction of such things, then the cost is obviously beyond the ability of the public sector to finance out of existing resources as well.

The solution to this conundrum is to allow the citizens of an area for the benefit of which the project is being constructed to finance its construction and become the owners of the capital, not the government. If a project can pay for itself out of future revenues, and there is no other reason for having the government own it except for the presumed inability of either the private or the public sector to finance out of existing resources, it is far better to have the citizens directly own than the government, financing the construction using future savings.

CESJ developed the "Citizens Land Bank" concept to devolve State-owned infrastructure to private ownership. This would allow every citizen and legal resident to be an equal, direct owner of the land, natural resources and infrastructure in an area. Ideally, government should own nothing.

The second instance Moulton cited is even harder to justify, even in traditional, non-Just Third Way terms. When the tax base is expanding, the State should not borrow money just because it can. No government should ever spend a cent of the taxpayer's money, or create money for which the taxpayer will have to foot the bill, if not justified by need.

As Moulton explained, while an expanding tax base could, in fact, support a greater level of government debt . . . why? When the tax base is expanding, taxes should be used to meet current expenditures and pay down existing debt, not run up a larger debt, taking away any potential cushion for the bad times that seem inevitably to follow the good times. Going into debt in good times just because you can is (although Moulton would never have expressed himself so crudely) stupid in the extreme. Part of the problem today was caused by the expansion of public debt far beyond the ability of many countries to repay under Keynesian assumptions, and only with extreme discipline under Just Third Way conditions.

The debt can be repaid, but only if discipline is exercised now. Following the Franco-Prussian War, Prussia imposed an indemnity on France that Bismarck believed sufficient to destroy the French economy, neutralizing France as a rival to his new Second Reich. Contrary to expectations, the French were able to repay the entire amount in less than three years, thanks in large measure to the immense production of marketable goods and services by an economy in which the most productive enterprises — the vineyards, farms and livestock that were the backbone of the French economy — were broadly owned. Immense public debt can be repaid, but it takes the political will combined with increased production in which all citizens participate through capital ownership, and adequate financing repaid not with cuts in consumption, but with increases in production. That is, not past savings, but future savings.

That, of course, is the basis of binary economics and the Capital Homestead Act. Financing new capital formation by printing money backed only by the "full faith and credit" of the government, as today's experts insist is the only way it can be done, is economic and financial suicide. The only sane and feasible way of financing the future is to turn the present value of future marketable goods and services into cash by discounting and rediscounting private sector bills of exchange, not by emitting bills of credit in the hope that somebody will use the money to invest in capital and create jobs to maintain propertyless workers in their present condition that Pope Leo XIII described as "a yoke little better than that of slavery itself."


No comments: