Now that the elections are over, it is time to think about the federal debt. Most Americans seem to agree that our large federal debt is regrettable and ought to be reduced and eventually repaid. Because of the obstacles that are discussed in Keynesian economics, this will be difficult, if not impossible. At the least, it will require careful timing. Let us set that aside, however, and suppose that the federal debt can be reduced and ultimately retired over the next several years.
The federal debt is a liability of the federal government. We should pause to recall that the federal government also has some assets, ranging from stocks in General Motors to the White House and the national forests. If the assets were to be valued at their fair market value and the liabilities deducted, that would give us the net asset position of the federal government. I don’t believe this has ever been done, but it should. I assume the number would be negative, but it is not obvious that it always would be.
What does the repayment of the federal debt do? It sets the tax rate at something more than is necessary to pay for current government expenditure and uses the surplus to buy federal bonds from the private sector. The bonds bought may either be held to maturity in a sovereign wealth fund or immediately canceled. Either way, the net asset position of the federal government would be increased. Eventually the debt would be reduced so that the federal government asset position would be positive.
Let me restate what I just said in somewhat different words: Repayment of the debt would use the tax system to transfer wealth (federal bonds) from the private sector into public ownership. Isn’t that socialism? Alan Greenspan certainly thought it was. Greenspan’s remarkable endorsement of the “Bush tax cuts” in his testimony in 2001 was based in the premise that permanent government surpluses would eventually lead to public acquisition of corporate shares and so to “socialism.” He argued that the government surplus could not just be turned off at will without disrupting the private sector, and he considered this enough of a threat of socialism that he advocated the tax cuts specifically to avoid paying off the debt.
Not many socialists have explicitly advocated paying off the public debt (as opposed to simply canceling it), but Sir Arthur Lewis did. Lewis was a Nobel Laureate economist and a Fabian socialist, and in “The Principles of Economic Planning,” he advocated a permanent government surplus as a way to gradually transfer the corporate sector of the economy into public ownership. Lewis, like most socialists, was not a Keynesian.
You should make your own decision, but make it between real alternatives: Do you want socialism, or do you want huge public debts? You decide.
Roger McCain is a professor of economics at Drexel University. He can be contacted at firstname.lastname@example.org