James Tobin On Public Debt

James Tobin was one of the greatest economists. He had stock-flow consistency, understood how the monetary and financial system worked and had great ideas on open economy macroeconomics. However, he struggled to express his ideas at a more formal level, especially since he used some neoclassical formalism.

This post may be of interest to Neochartalists. It seems there was a Committee on Public Debt in 1949 and they released a report Our National Debt (Sage Journals link). James Tobin reviewed the report.

Tobin begins by saying:

The peace of mind of a conscientious American must be disturbed every time he is reminded that his government is 250 billion dollars in debt. He must be shocked by the frequent announcement that every newborn baby is burdened, not with a silver spoon, but with a debt of $1700. The citizen depressed by these somber calculations will find no solace in the book under review. The Committee on Public Debt Policy and its advisors are leaders in the worlds of banking, insurance, business, economics, and education. Experts in finance, they have undertaken to enlarge public understanding of the debt. The Committee believes that the challenge can be met, the difficulties overcome, the crisis surmounted. But these hopeful prophecies are voiced in the tone of a leader summoning his people to an uphill struggle which will demand all their courage, wisdom, and devotion. The world is too full of such struggles, and the Committee does the public it wishes to enlighten no service by elevating to epic status the management of the national debt.

The book permits lay readers to retain misconceptions of the nature of public debt and exaggerated impressions of its present size. The amateur is bound to project to a national scale his own experience of private debt. To him “debt” is a frightening word, and counting debt in billions staggers his imagination. But a national debt is a burden on the nation analogous to the burden of a private debt on an individual only if the nation is in debt abroad. If the United States owed 250 billion dollars to foreign creditors, our real national income would be reduced by the five billion dollars of our annual production exported to pay the interest. As the debt became due, we would face additional sacrifices to repay it, or we could extend it only on terms allowed by foreign lenders. Happily the 250 billion dollars are owed by the Government to its own citizens. Indeed, about one quarter of the present debt is not even an obligation of the Government to its citizens; it is essentially a debt of the federal government to itself or to state and local governments. Payments of interest are not an external drain on our production, and, thanks to the lending power of the Federal Reserve System, the Government need never encounter difficulty in refinancing existing debt or in borrowing more money.

The Committee’s report seemed to have been insistent on retiring the public debt on which Tobin says:

… Deficit spending in times of high demand and full employment is certainly inflationary. This does not prove that old public debt, merely by its continued existence, is inflationary and should be retired.

The present debt represents almost entirely the wartime savings of Americans, who earned record incomes in war production and could not find consumers’ goods to buy. Had the war been financed wholly by taxation, the public could not have acquired these savings …

And on interest payments:

The second possible danger in the public debt is the burden of interest charges. Transfer of interest from taxpayers to bondholders is a nuisance. Committing a large share of the national income in advance as interest on the debt weakens incentives for effort and risk-taking. Interest transfers may promote income inequality. These evils are scarcely serious enough to justify sacrificing other objectives of current public policy to a commitment for debt retirement. Interest payments now amount to only two per cent of the national income; the percentage should decrease with economic progress provided full employment and low interest rates are maintained.

And finally:

… Decisions concerning current taxes and appropriations should be geared to the current economic situation; they should not be influenced by irrational fear of the national debt. But the debt will undoubtedly continue to be an ideological symbol invoked in every public debate. The purpose of this book, the advancement of popular understanding of the debt, remains unfulfilled.

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