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ARTICLE

Getting Governments Out of Debt

SEPTEMBER 01, 1984 by KENNETH MCDONALD

Kenneth McDonald is a freelance writer and editor, living in Toronto.

A curious feature of the economic scene is the persistence with which commentators regard government’s financial affairs as being somehow different from everybody else’s. Government’s indebtedness, both in its annual form of deficits and in its perennial form of accumulated debt, is merely a subject for debate. Some would reduce it, while others hold that it could be increased to the general advantage.

None of them, we can assume, would countenance, in their personal affairs, anything approaching indebtedness of comparable proportions. Any tendency in that direction would be corrected at once. Yet they attach no such urgency to the national debate. Whether the debts are accumulating in Washington, or Ottawa, or London, no date is set for repayment.

It is not so much that those capitals are remote from the generality of citizens as that what goes on there is too vague to be understood. What, after all, is the citizen of Terre Haute, or Temiskaming, or Totnes to make of departments of state too numerous to recite, and inhabited by people of whom one Canadian Auditor General wrote that “30 per cent don’t know what they are supposed to be doing”?

It is in this vagueness, this lack of a power to grasp, that the trouble lies. The housewife knows how much there is to spend, and budgets accordingly. So does the businessman. So, within certain limits, does the corporate executive.

The housewife’s budget may provide for mortgage payments, the businessman’s for repayment of long-term debt, the corporate executive’s for obligations to debt and equity. But each one represents both payment toward eventual discharge and provision for the same out of earnings. (Equity may not be discharged, but shareholders are free to dispose of it.)

Not so with governments. Whatever payments they may make are not to discharge the debt but to pay interest on what was borrowed before plus the interest on what has been borrowed lately. That the money to pay interest may also be borrowed, until the borrowings compound one another like boxes in a Chinese puzzle, goes unremarked. This year’s deficit commands the headlines. Yesterday’s and tomorrow’s must fend for themselves.

Participants in the debate who opt for reducing the deficit and, eventually, the debt, declare that either spending must be cut or taxes raised, or both. Likening the national budget to other budgets, they offer like treatment: excess of expenditure over revenue calls for spending less or earning more.

Another Way Out

But there is another way, one that businessmen were forced to follow during the past two years. Faced with declines in earnings, their path to debt reduction lay through asset sale, through lowering the debt ratio by selling equity, and withdrawal from unprofitable activities.

So could it be with governments. After a century of growing state interventions in the economy—1984 is the 100th anniversary of the publication of Herbert Spencer’s The Man Versus The State*—there is enough evidence to show that governments are unsuited to running businesses. Their job, which only they can do, is to set the rules of the game and to see that the players abide by them.




* Herbert Spencer, The Man Versus The State, Liberty Classics, 1981.

As Spencer wrote: “Every additional State interference strengthens the tacit assumption that it is the duty of the State to deal with all evils and secure all benefits. Increasing power of a growing administrative organization is accompanied by decreasing power of the rest of society to resist its further growth and control . . . The people at large, led to look on benefits received through public agencies as gratis benefits, have their hopes continually excited by the prospect of more.”

The task for commentators, and for enlightened political leaders, is to make the connection between those “gratis benefits” and the public debt.

It is safe to assume that a majority of citizens, having given the matter a moment’s thought, will conclude that none of the benefits can be gratis. The public agencies’ staffs must be paid, the facilities from which they supply the benefits must be built and maintained. The equipment they use must be manufactured and paid for. All these costs are a charge on the public purse. Yet any suggestion that the services be priced, and that the citizens who use them should pay the prices, is said to be politically unacceptable.

The provision of “universal” services, for which everyone pays indirectly, and which results from a supposedly democratic process, has become a political fixture. A major element of national economies is sheltered from the economic pressures that contain the other elements. The costs incurred rise under the impetus of unchecked demand. The element that is sheltered be comes a major component of the public debt.

Ideally, bringing the reality of price to those services would be debated by political leaders. But self-interest prevents it. The fear of defeat at the polls is more pressing than the debt that stems from the policies. They are in what psychologists call a social trap. Like drug addicts who know that the addiction is harmful, they seek temporary relief in exchange for lasting damage. Like those other addicts, they need outside help.

It lies with the financial community whose spokesmen are most prominent in criticizing the debt. Not that the nation’s leading bankers and investment dealers are impartial. Financing the debt constitutes a sizable part of their business. The trap they are in is similar to that of the politicians, with this difference: that the financiers have the means to get out of it with advantage to themselves.

The debt crisis presents them with the opportunity to assist governments in applying the same rein-edies that businesses were forced to adopt: selling tangible assets (which has already begun in Britain and the U.S.A.), selling equity, and withdrawing from unprofitable activities.

To this end, and taking elements of the state’s activities in turn, they would tailor prospectuses accordingly. One might describe an equity offering to finance the operation of one or more universities by a company to be formed for the purpose. Another might make a similar proposal for public and high schools, another for public transportation, yet others for health and hospital care.

These instruments would supply the focus for debate. Politicians would have firm proposals to consider, practical alternatives to the present methods.

Included in prospectuses would be the requirement that all operators of enterprises that emerged from the financing must conform to standards that national or local governments would set and enforce. Also included would be estimates, based on analyses of past operating costs, of potential earnings. Of necessity, these would assume that the facilities’ clients paid for the services that were supplied, and here, of course, is the nub of the argument.

Now, everyone is paying indirectly for services that are available to all but which not everybody uses. The market mechanism which furnishes a multitude of products at prices to suit a multitude of pockets is stopped short of the products that governments dispense. Stopping that mechanism stops also the checks it imposes on waste, inefficiency and heedless spending. Therein lies the root of the debt. Though many of the services are supplied by local authorities whose borrowing is usually limited by statute, it is the money-issuing national government, sending its subsidies and transfers and grants through-out the land, that accumulates the debt.

In short, an undertaking of this kind would involve neither a cut in spending nor a rise in taxes. Rather would it bring about a cut in borrowing and a transfer of spending from governments to the citizens. Taxes would fall of their own accord. Instead of being involuntary debtors in a system of monopoly services that gives them no choice, citizens would become shareholders in enterprises that vied for their custom.

None of this would happen overnight. The proposition does not lend itself to the sort of grandiose concepts that have landed us in the mess we are in. Rather does its chance of success depend upon experiments here and there, learning from mistakes and profiting by examples, in the market mode.

But who can doubt that it is the direction to take?

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September 1984

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