Lorie Tarshis on National Debt

Tarshis was a student of Keynes, and the author of an early textbook (published in 1947, a year before Samuelson's more well known manual), which included the main elements of Keynesian economics (Colander and Landreth discuss the reception of the book here).  One of the last chapters of the manual deals with national (meaning public) debt.  Note that this was written when the debt-to-GDP ratio in the United States was around 120 percent. First, contrary to many economists today, he clearly distinguishes public and private debt, and notices that:

"Since it [the Federal Government] may either impose taxes, or borrow through its control of the banking system, there can be no question of the federal government going bankrupt."

Interestingly, at that time, even at the beginning of the McCarthyte Red Scare, he would not imagine the possibility of the debt-ceiling not being raised.  So default in domestic currency is impossible. Further, he argues that:

"Even though a high federal debt threatens neither bankruptcy nor an exhaustion of government credit, it does have certain other consequences. ... If the government collects taxes to pay interest on its debt, it transfers money from the tax payer to the bondholder ... the transfer is in the direction of those in the higher income brackets ... [that] generally reduces the propensity to consume."

For him, there are a few solutions for the contractionary bias of public debt financed by taxes.  Reduce the rate of interest, by having the Fed buy bonds, and borrow from the Fed.  Shift taxation from the poor to the rich, reducing Social Security taxes and increasing the marginal tax for higher income brackets.  Republicans are adamantly opposed to the second alternative, and are going to eliminate the first by not allowing the debt-ceiling to be raised.  The consequences are clearly contractionary, as a good manual, back in 1947, already showed.

PS: To have an idea of how strong anti-Keynesian ideas were among businessmen see the following letter in response to Leonard Reed's campaign against Tarshis's book.  Would also recommend Invisble Hands, by Kim Phillips-Fein.