Abstract Where does the reasonable debt scale lie? How to introduce the political, economic and social changes and developments, as well as the shrinking and expansion of Public debts’ own functions into measurement and the research to explain the public debts’ scale? Both questions are demanding prompt solutions in the field of public administration. From the perspective of the changes of government’s administrative function and economics respectively, this research sets up a framework for studying public debts’ scale and explains the relationships among variables. The conclusion shows that as an important executive tool of government’s economic function, public debts deeply reflect the paths choice of political, economic and social changes. Focusing on both the well-being of the people and the financial solvency will be the breakthrough point in the studies of the changes of the system and public debts in the future.
Key words Changes of government’s function, Public debts’ scale, Research framework
How many public debts should a country maintain? How should the changes of government’s administrative function affect the change of public debts’ scale? Does a relatively stable debt ratio relationship exist? Such questions are all frequently mentioned in the researches of public debts in the field of economics, yet no conclusion has been agreed on. Up to date, the public debts of each country have been far beyond the scope of debtor-creditor relationship, but, on the view of macroscopic, a significant tool for implementing financial and monetary policies by the state and, the view of microscopic, an important part to make up home wealth relationship.
Since the 1970’s, the members of the OECD organization, Italy, Belgium, Japan and Ireland have accumulated a large public debts’ scale, while Norway, England, Germany and Fenland have implemented conservative financial policy one after another. It is reasonable to say that each government has tried its best to control its public debts’ scale. Nevertheless, where the reasonable debt scale lies and how to introduce the political, economic and social changes and developments (Chamerblain,1945), as well as the shrinking and expansion of public debts’ own functions into measurement and the research to explain the public debts’ scale, have become a systematic and complex topic in the macroeconomic research ( Huang, 2001).
From the empirical tests of Barro(1990, 1991), Bohn(1998), Mendoza & Oviedo(2004), we can find that some countries whose debts’ scales are far beyond “international warning line” are still prospering, while some others whose debts are insignificant are in financial danger. This fact indicates that the existing theories and explanatory methods of public debts’ scale measurement have been hard to measure a country’s public debts’ scale completely and precisely. Fabulous exploration to the nature of public debts and equilibrium model has become a hot issue to be studied nowadays.
From the public perspective, national debts are important means for a country to give full play to its functional roles, as well as the guarantee to realize other public functions. Go further and say, beside the rigidity in quantity, the demand for national debts by a country also has a considerable feature of temporal rigidity (Barro, 1974). Public debts in self are the debts of a country to raise financial capital (Ye, 2001). National debts firstly belong to financial scope. The revenue of public debts is financial revenue acquired by government with compensation. National debts’ scale is the government’s solvency to debt. Secondly, on the financial markets of marketing economics, the transaction of public debts is an essential part, having an obvious impact on asset pricing and the forming process of interest and foreign exchange rate (Friedman, 1978).
From the micro-perspective, the wealth distribution by a country, as well as the efficient saving scale and structure of household account, are the offering scope of national debts. Meanwhile, the public concern about public debts’ scale is concentrated on the increase and decrease of expecting taxation (weather overlapping generational transfer of taxation exists), and the value retaining and increment of assets. This also affects the offering scope of national debts. Besides, the overlapping generation problem of public debts nowadays has been impossible to be simply explained by household account. The accumulation and transfer of intangible capital, the wealth effect of open markets have become questions urgently for answers.
Anyway, weather a country’s national debts’ scale is appropriate or not, has been far beyond financial scope, but the connection of treasure and finance, as well as an important mean to improve the well-being of the people. It is a set of macro-questions and micro-questions. To explore measurement models for public debts’ scale which are in harmony with present political, economic and social environments is a hotspot focused by both the theory circle and the government.
2 Review of the Nature and Research Paradigm of Modern Public Debts: Based on the Changes of Government’s Administrative Function
This research is estimated in the research framework of public debts’ scale during the changes of administrative function. We are to restrict the range of study to the measurement and net value of public debts’ scale, and to exclude the impact of market behavior to the price of public debts. Furthermore, the debts are supposed to be taken on only by domestic residents.
The academic world has already basically agreed on the compartmentalization of the studies of national debts and their scale, as well as the choice of research paths, that is to explore the effect of the intervention of government’s economic policy on many aspects of social and economic life. (Myles, 2001) The method still follows the classical research path of economics, including three primary points (Qian, 2007)
Perspective: From the viewpoint of economists, each problem is based on three fundamental assumptions: the preference of rational-economic man, manufacturing technique and institutional constraints, endowment of resources available, including information. For instance, based on the assumption of the preference of rational-economic man, Samuelson (1999) believes public debts are the contingent result of the implementation of financial policy by the government, and deficits are the major inducement of national liabilities, while the loss of the crowd of capital and tax efficiency is just the cost of economic stabilization. The assumption of rational-economic man is self-interest. However, to the preference of altruism which is based on the real situation, Barro (1974) contributes a fair explanation to the controversial Ricardo Invariance Theorem. In the paper of Are Government Bonds Net Wealth? Barro argues the rational expectation of natural man determines that public dissymmetry of revenue and expenditure would not take place in the spending of public debts. The expectation of tax increment together with the preference of being responsible for later generations make the consuming behavior go rational, and then a series of completely new conclusions, which are called Barro- Ricardo Equivalence Theorem, have been derived out. The appearance of this theorem eventually results in hot discussion by economists in the following thirty years. (Buchanan, 1977; Buiter, 1984,1992; Blanchard, 1985,1990; Eisner, 1986; Hamilton, 1986）
Reference or Benchmark: the Arrow-Debreu Theorem in the General Equilibrium Theorem. This is one of the primary references in the research of public debts, since there are two economic subjects in the standard Arrow-Debreu economics: consumers and producers. Moreover, in the extensional theorem by Myles, government is taken into account, which provides the possibility to explain the public debts’ scale from both the micro- and macro-aspect. Barro(1979) from the macro-aspect, solves many problems lay on the micro-aspect, making up for the deficiency of that the majority of the discussions on public debts’ scale are limited on the macro-aspect in the past. At the same time, he breaks up the traditional mechanism of debit and credit, and elaborates the tax expectation, the positive effect of government expenditure in the current period, as well as to the public, the revenue effect and the conduction to the nominal liabilities’ increment in the condition of inflation expectation of countercyclical public debts, and arrives at a static general equilibrium result.
Analytical tools: the overlapping generation model by Paul Samuelson. Since this model takes the limitation of life and the incompleteness of the overlapping generational markets into account, it becomes a useful tool in the studies of economic growth, financial policy, and social security and so on. Overlapping generation model is the primary method to connect the exploration to public debts’ scale in macroeconomics and the effect of public debts in microeconomics. A considerable majority of theorists who are studying public debts’ scale are exploring problems, such as the relationships between public debts’ scale and deficits (Blejer and Cheasty, 1991; Auerbach, Gokhale and Kotlikoff, 1994; Battaglini and Coate, 2006), between national debts’ scale and economic growth (Barro, 1990), between public debts’ scale and public choice (Buchanan and Wagner, 1977; Alesina and Tabellini, 1990), and between public debts’ scale and tax rate, interest (Barro, 1979; Tobin, 1986) under the framework of overlapping generation,
By reviewing the history of past researches, we could find that the cognition of public debts’ scale keeps changing and developing accompanied with the understanding of national debts itself.
Tab.1 Review the History of Past Researches on Public Debt
|Time||Representatives||Main Points||Representative School|
|17th~19th||A. Smith,D. Ricardo||Budget balance, public debts are public burden, government with least intervention is the best one, Equivalence Theorem by Ricardo||Classical School|
|1930s~1970s||KeynesClower(1965), Patinki(1965), Barro and Grossman(1971), et al.||Not have to obey budget balance. Issue national debts when efficient demand being deficient to decrease taxation and expand financial expenditure. “ Expenditure Multiplier Effect”||Keynesian School|
|1948||Lener||Focus on excessive public debts’ scale, overlapping generation causing taxation, compare public debts and non-government debts, try to eliminate the negative effect of debts||Keynesian School|
|1958||Lener, James Buchanan||Through subjective estimation, concern about individual, confirm the existence of overlapping generation of public debts||Keynesian School|
|1970s||Barro(1974，1979)||Based on rational expectation theorem and overlapping generational altruism, alter Ricardo equivalence theorem and establish Barro-Ricardo Model||Rational Expectation School|
|1970s~||Barro(1979), Lucas and Stokey(1983) et al.||Taxation Spreading Optimization Theorem caused by national debts’ scale changes, also called Taxation Smoothing Theorem||Rational Expectation School|
|1970s~||Buchanan and Wagner(1977), Nordhaus(1990), Alseeina and Perotti(1995) et al.||Consider the impact of the public to public debts, communities competition, and the use of social resources||PublicChoice School|
3 The Impact of the Dissymmetry of Financial Revenue and Expenditure Caused by the Changes of Government’s Administrative Function
Public debts together with taxation are the major parts of financial revenue. The aim of public financial revenue is to realize the national functions through financial expenditure. In the circle of finance in China, there are wide controversies on weather to determine expenditure by revenue or to determine revenue by expenditure, which in fact involves the close relation of reciprocal causation between public debts’ scale and financial revenue and expenditure. When refer to which is the cause and which is the result, further discussion is passed over here. On the expenditure management of public debts’ revenue, each country has its own experience. For instance, the Golden Rule of Japan. In one word, on the developing stages of different societies and economics, the internal demanding and external appeal to implement government’s function are the determinant of financial expenditure. Ye (2001) believes the dissymmetrical structure of financial revenue and expenditure in demands public debts as the lubricant of the institutional changes.
Generally speaking, public debts expenditure is a significant part making up financial expenditure. As for the concern that the supplying process of public goods may cause the distortion of taxation, then cause excess burden to demanding taxpayers, Lau, shehinsky & stigliz (1978) through optimizing expenditure, especially adopting public debts, realize not only the supply the necessary public goods but also the optimization of taxation path. Moulin (1987) points out that the essence of public goods supply is the issue of economic benefits. However, there are two major problems, one of which is a mechanism is needed to make the production of public goods efficient. Ladyard & Palfrey (1999) alter the design idea of Myerson mechanism, and bring Bayesian mechanism design framework into the paths choice of public goods supply, focusing on both public welfare and national welfare. As to public welfare, financial taxation expenditure and public debts expenditure are concerned.
Of course, the cores of the researches above concentrate on the impact of the supply of public goods to financial expenditure. Due to the dissimilarity, payoff, time interval and unilateral movement of value between taxation expenditure and public debts expenditure, the later one has different risk form taxation distortion. (Ye, 2001) Aiyagary, Marcet, Sargent and Sappala(2002) mention that in Lucas and Stokey economics, Ramsey planners have to follow the assumption of risk-free public debts to guarantee a near unit-root in the incomplete markets. Although this research does not make a necessary estimation to the risk of debts directly, it does a significant contribution to taxation optimization. We can also observe the close relation among public debts, deficits, expenditure and taxation in finance. Suppose we reverse the assumption, admitting the optimization of taxation, and then observe the risk of national debts, especially the one of expenditure, we may see some interesting results.
It can be said that only by considering the risk of revenue and expenditure can not tackle the problem in public debts expenditure. Comprehensive understanding in national debts expenditure is imperative. Our research believes that the expansion and shrinking of public functions brings the functions of national debts to keep changing. The necessity of the input of non-assets is not in the range of traditional functions of public debts expenditure. However, during the institutional changes, more and more non-investing expenditures are rigidity, and as to government’s social expenditure, such as social security offering and public security (Green, 1977), national debts expenditure can work fairly well.
Rosati (1996) by non-altruistic model mentions the conditions of the uncertainty and endogenous of social security guarantee. The continuous increasing of budgets and debts, together with the uncertainty of individual savings, results in greater risk in individual guarantee. Bohn (1997) announces that higher social expectation and economic development lead to the shortage of the fund of social security. The reforming of the social security system and the carrying out of financial markets call for the role of the expenditure and implementation of public debts.
Nevertheless, opposite opinions exist. Kellermann (2006) say that the efficiency of public debts expenditure is established on social preference being lower than real interest. In the so-called golden rule, the expenditure growth by the expansion of public debts’ scale is not necessarily more efficient than that by taxation.
From the micro-aspect, Bohn (2001, 2006) further believes as to the pension, individual budget restrain would eventually affect that of government seriously. Specifically speaking, aging society’s coming makes taxpayers decreasing and people who need guarantee increasing. The best solution to aging is by individual saving and government subsidy. In order to avoid the taxation distortion and financial shock, national debts expenditure is not a bad choice, and being supplemented by index calculating mode of revenue, debts and taxation could engage for the financial stabilization at the same while satisfy the social demands.
Hurst & Willen (2007) introduce the condition of household debts into social security investigation, and find that it is not rare to have a negative household saving. This leads to heavier burden for the state to take care of the aged, since people have been used to turn to the government when they are old. In their experiment, such preference leads the young to use social expenditure to pay back their debts and further leads to the expansion of government expenditure inevitably. Social security without any conditions is to be unsustainable, and the performance of public debts expenditure has to be concerned.
4 Model Illuminations
From the perspective of the changes of social and government functions, this paper investigates the measurement of national debts’ scale. In most countries whose control mechanism is not complete, government takes on greater responsibilities for social governance, which is also caused by social transformation and public appeal in the changes of government functions. Through the social governance model, it indirectly regenerates government functions, providing necessary social capital for economic transformation, stabilization and sustainable growth. Generally speaking, government should provide minimum guarantee for economic and social development, primarily including lots aspects of social security.
Here we draw into (1) (Mendoza and Oviedo, 2004). Now we consider how the new restrains impact on public debts’ dynamic equilibrium in the long term.
Suppose that the input of national security is shown as a separate item from the financial expenditure in the current period and is supplemented by public debts (including transfer payment and non-fixed-asset investment). Revenue and expenditure outside the budget are not taken into account here. Barro (1979) views the increment of national debts caused by transfer payment as a part of debt growing ratio. Meanwhile, take war for example to present issues that need to pay at one time. Nowadays, all of the socially financial expenditures in each country, such as public projects with huge investment, repair of social security system, exemption of debt in state owned enterprise restructure and even bankruptcy, have similar features, which need pay at one time. By considering the rigidity of annual financial scale, increasing the issuance of public debts becomes a preferable choice, in order to avoid the distortion of taxation in overlapping generation and excessive fluctuation of tax rate. This can be looked up in the researches of public debts’ micro-effect by Bohn (2002), Barro (1974).
Take the repair of pension system for example to illustrate the equilibrium relation between public debts’ scale and the distribution of financial expenditure.
Bohn (2001) raises that (2), represents the debts accumulation of government debts accounting for pension at period t. represents the increment of debts caused by debts cost payment. represents the individual allowance of pension payment. is the tax rate in this period. is the benchmark of salary in this period. is the number of payers in this period. Combining (2) with (1), we get:
Here represents other government behaviors that need special national expenditure, which is random variable. However, it is not independently distributed as it is related to. Equation (3) shows two points: one is partial restrains of public debts’ scale are determined by macro-finance, monetary policy and micro-fundament together. Besides, the time effect is obvious too; the other is Model (3) can be viewed as the result of a short-run equilibrium in limited time interval, which is similar with war liabilities in the past researches, of course the expansion of is inevitable. From another perspective, the assumption of financial revenue and expenditure balance is questionable (Blejer, 1991; Barro, 1979). Weather the asymmetry of short-run and long-run equilibrium of public debts exists or not will be discussed in the future.
Along with the idea of service-oriented and performance-oriented government been widely accepted over the world, new administrative mode and institutional arrangement is inevitable to be carried out. As an important executive tool of government administrative function, public debts will deeply reflect the paths choice of political, economic and social changes. Concerning about the scale of national debts and its measurement, as well as proper adjustment and further understanding the existing idea about public debts’ scale, will be vital to the reforming of administrative mode and even the development of the country.
From the perspective of economic normative research, this paper constructs the research framework of the impact of administrative mode changes to national debts’ scale, and arrives at a conclusion that the measurement of public debts’ scale contains not only debt service ratio, ratio of dependence on debts and debt ratio and so on, but also many causalities, such as the ones between supply and demand, macro and micro, shout-run and long-run, finance and non-finance, reflecting the determining process of public debts’ scale. Focusing on both the well-being of the people and the financial solvency will be the breakthrough point in the studies of the changes of the system and public debts in the future.
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He Dai-xin, Ye Zi-rong, Chen Lei
(National Academy of Economic Strategy of CASS and Southwest Jiaotong University, Chengdu, P. R. China, 610031)