Getting Rid of Government Debts – Part 1

Debts have reached a level that is causing trouble for many communities and states all around the world. To an extent, these debts are exploitative: future generations of tax payers have to pay them, or pay interest on them, and in many cases, they don’t get anything in return. They will have to pay for things consumed long ago.

However, not every bit of those debts is exploitative. If we use credit to finance things that benefit people of the future, it is fair to let them pay a share of the costs.

For example, if we build a bridge that can be used by people from the next generation, it is fair to inherit both the bridge and some of the costs to them. This means that in such cases, financing by credit is all right. If today’s taxpayers would have to pay for the bridge 100% and then the next generation would get it for free, we could view that as an instance of exploitation the other way around, exploitation of today’s people by those of the future.

If we generalize this idea, we see that our public debts can be divided into two parts:

  • On one hand, there are debts that are backed by assets. We inherit assets to the next generation and we might inherit debts as well up to the value of the assets passed to the next generation. This means that the next generation would not just inherit these things. We can think of it as selling these things to the next generation
  • On the other hand, there are debts not backed by assets. Passing these debts to the next generation is unfair. It is an instance of exploitation. Exploiting others is ethically unacceptable. Therefore, these debts must be paid completely by the present generation.

In this article, I am going to discuss the first case; I will turn to the second case in a subsequent article.

According to these considerations, the acceptable level of public debts should depend on the total amount of public assets, from bridges and streets through government owned land and buildings, to national parks, museums and scientific libraries. The problem here may be to assign a fair value to all of these things, but I suppose such problems can be solved.

Let us return to the example with the bridge. The authority owning it may, according to the considerations above, hold a credit up to the value of the bridge. The money is provided by the next generation. People in the next generation can, of course, apply the same argument: they hand the bridge down to the next generation and pass the credit on as well. So actually, that credit does not need to be paid back as long as the corresponding asset, in this case the bridge, remains in a good condition.

What each generation has to pay for, of course, are the costs of running and maintaining the bridge: expenses for new parts and cables, fresh paint, worker’s salaries, disposal of waste materials like old paint, insurance fees, office costs, lighting etc.

If the bridge is dismantled, however, the initial credit would have to be paid back. If the asset is destroyed, the corresponding credit turns into debts of the second kind which are not backed by an asset. If we build a new bridge, however, we could finance the initial costs of building completely by credit. This credit would never have to be paid back as long as the asset exists.

Essentially, we would have to pay not when we create something but when we destroy it. If we creat something that is of value for the next generation as well, we can just finance it by credit. However, if in building the bridge, we destroy something else, e.g. a piece of forest, we would have to pay for destroying that.

There might be some kind of interest on such a credit. Specifically, if the money is devaluated by inflation, there might be some interest to compensate that. However, we would not have to pay that interest. We could just add it to the credit amount on the account.

Now the problem is: who will give us such a credit, if they never get the money back nor receive any interest? The answer is that we would have to change the laws concerning our central banks. We would have to allow the creation of organizations that can open a special account in the central bank and take out money to finance some asset they create or buy. You can think of such an organization as a kind of foundation that would hold and maintain the asset and finance the costs of initial creation or acquisition by such a special credit. Practically, this way, we would create new money. We could call this scheme “asset-backed money creation”.

We don’t have to view the “credits” these organizations would take as debts in the normal sense. These “debts” are the money future generations pay for the assets we pass on to them. Future generations may then be viewed as the owners of these assets who hand down money to us for these assets, instead of getting them for free. The minus sign on the credit account in the central bank does not mean the money has to be paid back; it just means the money flows from the future to the past instead of the other way around.

Governments could create such organizations and sell their assets to them. With the money gained this way, they would pay back the part of their debts that correspond to the value of the assets. When credits of governments are paid back, money is taken out of circulation again. The total amount of money in the system would therefore not necessarily increase this way.

In order to maintain the assets, the organizations would either have to charge fees for services they offer, or, in cases where this is not easily possible, receive tax money to maintain the asset. In the case of a bridge, users could be charged a street charge. In other cases (e.g. the creation of a natural reserve, where, for example, rangers have to be paid) the maintenance costs might come from taxes. Alternatively, such organizations could also be endowed with additional income-generating assets, akin to foundations.

In the next article, I am going to look at the other part of public debts, the part not backed by assets.

(The picture is from http://commons.wikimedia.org/wiki/File:Ponte_Vasco_da_Gama_25.jpg.)

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2 comments

  1. […] the previous article, Getting Rid of Government Debt – Part 1, I have introduced a distinction between two types of public debts. One type is debts backed by […]

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