Richard Salsmans book is an extensive treatment of the theory of public debt as well as
of the practice of sovereign borrowing and indebtedness. Equal parts history of thought
and applied political economy, Salsmans project is comprehensive and well written, and
the topics it covers are certainly timely.
The introduction provides an overview of the books structure and outlines the
analytical framework Salsman will use in exploring theories of public debt. Salsman
classifies theories of public debt as pessimistic, optimistic, or realistic and the theorists
who espouse them as pessimists, optimists, or realists. Pessimists argue that public debt
is mainly pernicious, a hindrance to the effective employment of scarce capital. Optimists
argue that public debt is mainly beneficial, a necessary part of a strong states tool
kit in promoting economic prosperity. Realists eschew blanket condemnation or praise
of public debt, arguing it may be either pernicious or beneficial depending on social,
economic, and political context.
In chapter 1, Salsman covers the history of public debt beginning in the ancient
world and culminating in modernity. Key themes are the transition of government debt
from the private obligations of sovereigns to liabilities of the public at large, the development
of banking systems and their role in facilitating secondary markets for debt,
and how central banks affect public-financing conditions. Salsman also provides
aggregate statistics on borrowing for the OECD (Organization for Economic Cooperation and Development) countries, showing how the increases in public debt following World War II went hand in hand with larger public spending.
The second chapter focuses on theories of public debt from the classical period of
political economy, which in Salsmans treatment spans from Englands Glorious
Revolution (168889) to the subjectivist-marginal revolution in economic theory
(187174). The thinkers are a mix of optimists, pessimists, and realists, but the most
famous, such as David Hume and Adam Smith, are certainly pessimists. Also covered are
debates between Thomas Jefferson and Alexander Hamilton during the early days of
theUnited States as well as later between European classicals such asDavid Ricardo, John
Stuart Mill, and even Karl Marx.
Salsman turns in chapter 3 to Keynesian theories of deficit spending and public
debt. He first documents the early trends foreshadowing the repudiation of the oldtime
fiscal religion in the early twentieth century, especially in the years surrounding
World War I. Thinkers surveyed include Arthur Pigou, John Maynard Keynes, Alvin
Hansen, Abba Lerner, Richard Musgrave, as well as others. These thinkers are decidedly
in the optimist camp. Salsman shows that Keynes himself was more moderate on deficit
spending and public debt than his heirs. It is the Keynesians rather than Keynes who
deserve lasting credit for the academic sanction of public fiscal profligacy.
The title of the fourth chapter, Public Choice and Public Debt, is somewhat
misleading: about two-thirds of the chapter is devoted to surveying thinkers whom
Salsman classifies as precursors to the public-choice schools chief theorists on public
debt. These earlier thinkers include Antonio de Viti de Marco and Ludwig von Mises.
James Buchanan and Richard Wagner receive most of the treatment reserved for publicchoice
scholars proper, with some attention also paid to Michael Munger and Geoffrey
In chapter 5, Salsman engages more recent writings on public debt. Topics include
the relationship between public credit and public debt, the determinants of public-debt
sustainability, and the differences between debt defaults and debt repudiations. This
chapter also goes into significant detail on the relationship between fiscal behavior
and monetary behavior. Refreshingly, Salsman appreciates that differences in
monetary regimes can profoundly affect the fiscal agents choice calculus over debt, its
ability to pass on the debt burden to future generations, and the size of the risk
premium, if any, it is forced to pay compared to private debt. Although some public
economists recognize the institutionally contingent nature of public debt (e.g., its
causes and effects under fiat money as opposed to under a commodity standard),
Salsman rightly notes that this institutional contingency is not sufficiently appreciated
in the literature.
The final chapter is a brief conclusion. Salsman summarizes his arguments, reiterates
the importance of the optimist-pessimist-realist categories for public-debt theorists, and
warns of the perils that unchecked democracy poses for fiscal responsibility.
Overall, I found Salsmans book interesting and informative. Scholars of public
debt and of political economy more generally will want this work on their shelves. It is a fine text to consult for various research projects as well as to use as a supplemental text in
undergraduate or graduate courses on public debt. As I mentioned earlier, I found the
sections dealing with the mutual determination of monetary mischief and fiscal profligacy
to be the most stimulating. Much more work needs to be done exploring sovereign
borrowing strategies and their dependence on the monetary institutional environment.
I do have a few concerns. First, I am not convinced that the optimist-pessimistrealist
distinction is all that important to Salsmans project. The introduction makes it
sound as if this classification scheme is the books chief purpose, but the categories do
not carry much analytical weight. I think the book would have been just as useful with
these classifications omitted. Second, I would have preferred a more balanced treatment of the dangers of unconstrained politics. When Salsman warns of the dangers of politics gone awry, he almost always castigates extreme democracy. I am very sympathetic to this point, and I agree that it frequently needs to be made in our age of populist shibboleths. But this emphasis is more appropriate for a popular audience; for a scholarly audience I would have preferred to see more on the dangers of oligarchy or autocracy as well. Third, in his discussion of monetary influences on fiscal behavior, Salsman appears to argue that central banks can hold market interest rates below their natural rate for extended periods of time. Although this is certainly possible in the short run, I am skeptical that it can happen in the medium or long run. The market structure of interest rates obviously matters for borrowing conditions, so how much power central banks have to maintain a wedge between markets and natural rates will affect how we think about public finance.
These concerns do not detract in a major way from Salsmans contribution, though. I reiterate my enthusiasm for the project and recommend his book to all scholars working on topics related to public debt.