Public Debt Is Economic Nonsense
Please cite the paper as:
Gerson P. Lima, (2015), Public Debt Is Economic Nonsense, World Economics Association (WEA) Conferences, No. 1 2015, Ideas towards a new international financial architecture?, 15th May – 20th July, 2015
Public debt has been a widespread problem for mainstream economists have no effective procedure to deal with it and prevent its financial, economic and social negative consequences. This paper argues that the public debt is a macroeconomic phenomenon and not the simple company’s accounting situation mainstream economists imagine and suggests a new approach to the public debt trend based on the difference equation method. The main hypothesis is that public debt has a negative effect on the GDP and tax receipts while its interest expenses expand private credit supply and thus GDP and tax receipts thus providing extra revenue enough to pay the interest on the public debt. However, public debt, interest expenses and credit supply attained so high levels while consumer’s income expanded slowly that the positive effect through private credit is disappearing and no longer can compensate the negative effect of the public debt itself on the tax receipts. Consequently, the public debt may be causing more deficits and more public debt. It may have been thus created a positive feedback process that could lead the public debt to follow an explosive trend. The time trend of the public debt is given by the interest rate on Treasury bonds and the coefficient that measures the negative effect of public debt on tax revenue; the public debt time trend does not depend on the primary surplus. Therefore, austerity programs do not lead the public debt to the desired stability. An experiment applied to the United States in the period 1960-2007 does not allow for the rejection of this hypothesis. The conclusion is that insisting on austerity will lead to more financial crises; a new theoretical approach is required.
Gerson P. Lima, Macroambiente, Doctor in economic theory by the University of Paris (1992), Professor emeritus of macroeconomics at the Federal University of Paraná, Brazil, retired