The Political Economy of Public Debt: Three Centuries of Theory and Evidence (New Thinking in Political Economy series)

by Richard M. Salsman (Author)

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ISBN-13: 978-1785363375

ISBN-10: 1785363379

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How have the most influential political economists of the past three centuries theorized about sovereign borrowing and shaped its now widespread use? This important question receives a comprehensive answer in this original work, featuring careful textual analysis and illuminating exhibits of public debt empirics since 1700. Beyond its value as a definitive, authoritative history of thought on public debt, this book rehabilitates and reintroduces a realist perspective into a contemporary debate now heavily dominated by pessimists and optimists alike.

The book simultaneously explicates and critiques the most prominent theories concerning why states borrow in the first place, whether or not they borrow productively, the incidence of their debts, why they sometimes borrow too much and why they often default, whether explicitly or implicitly. The author classifies major public debt theorists as pessimists, optimists or realists. This book also examines the influence of regime types, especially why most modern welfare states tend not only to over-issue bonds but also to incur even larger implicit obligations via unfunded, off-balance sheet liabilities.

Scholars and undergraduate and graduate students in economics and political science, as well as policymakers, will find this analysis of public debt and public spending insightful and revealing.

Editorial Reviews

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'Richard Salsman presents a powerful indictment of the world's delusions about public debt. His arguments are so lucid and evidence so clear that even politicians and journalists can follow them with much profit.' --(Steve H. Hanke, Johns Hopkins University, US)

'The Political Economy of Public Debt is an insightful treatment of all the major theories and controversies regarding public debt since the 1700s. The author, moreover, is no axe grinder; to the contrary, he presents a fair and balanced narrative that will prove informative to all interested readers.' --(Richard Wagner, George Mason University, US)

'Salsman provides a very insightful integration of the history of public debt and the primary theories regarding the consequences of governmental debt. His discussion of economic laws and political science raise a clear issue about the relationship of unrestricted democracy and unrestricted public debt. This book is an important contribution to understanding an issue that will have significant impact on the future of western civilization. Well worth reading.' --(John Allison, Retired Chairman and CEO of BB&T and Retired President and CEO of Cato Institute, US)

About the Author

Richard M. Salsman, Assistant Professor, Program in Philosophy, Politics & Economics, Department of Political Science, Duke University, US

Product details

Publisher ‏ : ‎ Edward Elgar Pub (February 24, 2017)
Language ‏ : ‎ English
Hardcover ‏ : ‎ 336 pages
ISBN-10 ‏ : ‎ 1785363379
ISBN-13 ‏ : ‎ 978-1785363375
Item Weight ‏ : ‎ 1.41 pounds
Dimensions ‏ : ‎ 6.5 x 0.75 x 9.75 inches

Best Sellers Rank: #3,555,191 in Books (See Top 100 in Books)
- #1,082 in Public Finance (Books)
- #5,290 in Political Economy
- #7,692 in Economic History (Books)

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Robert E. Wright

Best Discussion of the Political Economy of Public Debt Since ... Alexander Hamilton's reports on public credit

Reviewed in the United States on September 17, 2017

Too many books just repeat the mistakes of earlier work, perhaps making a little tweak here or there. So endless books make fundamental errors, like the "fact" that Alexander Hamilton wanted a large government and a large, perpetual national debt. While not ignoring previous research, Salsman in this book actually returns to the original sources, the writings of (political) economists on public debt, where he discovers that some/most of the previous scholarly work is flawed. Hamilton, it turns out, was a debt realist, one of the few thinkers throughout history who saw both the positive and negative aspects of sovereign debt and worked to enhance the former and mitigate the latter. Most other thinkers, Salsman shows, were either debt pessimists, who irrationally avoid debt at all costs,or debt optimists, who irrationally take on debt to the long-term detriment of their nations. Right now, the debt optimists are ascendant in the U.S. and elsewhere, suggesting something akin to the great bubbles of 1719-20 could soon recur but that the Hamiltonian escape hatch (no war, prolonged period of deficits that are smaller than growth, efficient government) is still cracked open, if only policymakers were astute enough to use it.

8 people found this helpful

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John E. Tamny

Richard Salsman has written what should be viewed as the ...

Reviewed in the United States on September 16, 2017

Richard Salsman has written what should be viewed as the new standard when it comes to the history of government debt. Many readers are doubtless familiar with This Time Is Different by Carmen Reinhart and Kenneth Rogoff, Salsman operates on another - and much higher - level. Readers will see why Reinhart and Rogoff's conclusions were rather incomplete, and to be fair, incorrect. He also shows why the popular correlation between deficits and interest rates is less than impressive. Most important, Salsman's book is optimistic. He reveals why the end-of-the-world deficit hawks completely miss the point, but at the same time shows why those who think deficits are the answer to every economic ill similarly miss. One of the most important books of 2017, or any year. And it's one I'll be referencing for years in op-eds, along with my own books.

10 people found this helpful

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Andrew West

A must read for those who would understand the history and future of public indebtedness and its economic impacts

Reviewed in the United States on September 20, 2017

In our world in which government debt levels approach historic levels yet interest rates are falling to new lows, one group of economists predict imminent near-term debt default while another suggests that ongoing acceleration of government spending and borrowing is the path to rising prosperity. Richard Salsman’s new book makes sense of this seeming nonsense, meticulously categorizing the past three centuries of public debt theory and placing it in the context of historical debt practice, and integrating this knowledge to help us better understand what to expect in the near future regarding public indebtedness and its consequences, and why.
Salsman offers a new taxonomy of public debt theory: “Pessimists”, “Optimists”, and “Realists” succinctly categorizes the key fundamental beliefs in the field through its history to the present. He identifies where the leading thinkers of three major economic schools (Classical, Keynesian, and Public Choice) fall within this taxonomy. Summarizing his classifications, Pessimists tend to argue that public debt can bring little to no economic good, that government debt will inevitably bring insolvency, and despite typically favoring free markets and limited government, pessimists frequently show hostility to public creditors, often advising default. In the Pessimist category Salsman documents the writing of many economists including Adam Smith, Thomas Jefferson, Karl Marx, J.S. Mill, and James Buchanan. In the opposite Optimist category are those that argue that market failures abound and that deficit spending and public debt accumulation can boost economic activity without burdening either present or future generations. Almost all are Keynesians, though Keynes himself was more restrained than his followers Alvin Hansen and Abba Lerner. Lerner, previously unknown to me, arguing for unrestrained deficits and debt, administered without regard to any traditional rules or principles in what he called “functional finance” was a harbinger of modern policy. Salsman presents a persuasive case in favor of public debt Realists, who assert government can and should provide an important but limited set of government services, that pubic debt should fund only services and projects that maximize its potential, but within the context of a nation’s productive and taxable capacity, recognizing that borrowing need not be harmful, but is also not infinitely available. Unlike Pessimists and Optimists who tend to resent and “rentiers”, Realists see public creditors as productive economic participants whose rights for repayment are to be respected. Salsman places Alexander Hamilton first among a number of debt Realists (which include Robert Mundell, Art Laffer, Harley Lutz, and Thomas Macaulay) and demolishes a number of myths about Hamilton’s economic views by referencing Hamilton’s own writings and actions.
While Salsman adopts a debt Realist perspective, and does not appear to anticipate debt crisis for the major borrowing economies in the near future, he does suggest a fairly sobering financial future if trends continue. Indebtedness appears likely to rise because neither intellectual nor institutional nor political incentives are positioned to stop a rising proportion of government spending as a percentage of the economy. Given the incentive of politicians and voters to defer the cost of paying for this spending (a topic discussed repeatedly in the book, particularly in the chapter on public choice economists), taxes will under-reflect this spending and rising borrowing will make up the difference. Current voting minorities as well as future generations will be required to pay an increasing proportion of the burden. At the same time, the burden of interest payments are being controlled by politically controlled central banks and the banks that are interconnected with them.
Reading this book as a global investor, I see a number of ways it can add value by inform investment decision making. By better understanding the different schools of public debt theory, I can better identify what policymakers will pursue given their beliefs and incentives. And the author also provides a framework for anticipating the likely consequences of those policies, as well as unlikely consequences. Chapter five, “The Limits of Public Debt” is particularly relevant for those concerned about future public debt forecasting. Salsman identifies a number of key contextual factors and ties it to the history of defaults and debt crises. Discussing the most recent influential book on this subject “This Time is Different” he identifies its virtues and deficiencies. Notably, Rogoff & Reinhart utilize what is ultimately a single factor model of debt to GDP to predict negative consequences of debt, while Salsman offers additional relevant factors excluded from their analyses that would better inform expectations. They ignore a country’s taxable capacity, and perhaps more importantly, monetary regime. In the modern era when the largest public debtors are borrowing in their own politically controlled fiat currency, explicit default is rarely what public choice economic theory indicates politicians will pursue, rather implicit default via inflation or via financial repression is the easier path, a path that allows for far greater debt to GDP ratios than Pessimists would believe could be sustained without crisis. However, unlike the debt Optimist’s view, we can also expect that high levels of consumptive spending and debt will come at a cost to economies. And in emerging markets investors must note differences in monetary regimes, taxable bases and political incentive structures that lead to debt problems even at lower levels of borrowing.
I strongly recommend this scholarly yet entertaining book for those interested in the intellectual history of economic theory and public debt, as well as those interested in better understanding how ideas, politics, and policy are likely to shape global economies and capital markets in the future.

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Robert

Excellent read! Salsman clarifies this complex topic by providing ...

Reviewed in the United States on September 17, 2017

Excellent read! Salsman clarifies this complex topic by providing a lucid history of public debt from ancient and medieval times through Keynes and the present and by untangling the ideas behind the history.

My favorite section (appearing in Chapter 2) is "Early American Debate: Hamilton Versus Jefferson." Salsman perfectly characterizes Hamilton’s fiscally sound policy, which "holds that all economic sectors (agriculture, manufacturing, finance, and commerce) are productive and interdependent," and distinguishes it from that of Jefferson, who, "enamored by the French physiocrats, believes that only agriculture produces a net product and that all other sectors are parasitic on farming” (p. 58).

If you want to know what made America tower over all other countries in terms of productivity, the answer lies in this very distinction.

This work should become a textbook in economics classrooms and would be a vital resource for today’s (and all future) Treasury Secretaries.

3 people found this helpful

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