Last Thursday, President Chen Shui-bian (陳水扁) praised the British economist John Keynes' theory of raising public debt to promote public construction projects as "hatching golden eggs for golden hens." He also claimed that objections by the opposition parties -- that the expansion of public debt will in fact leave more debt to our children -- was actually not only a result of misunderstanding the theory but also a political distortion.
Keynes is seen as the world's most important economist during the first half of the 20th century. The economic revolution triggered by his theory was unstoppable until the 1970s. He was later challenged by the US economist Milton Friedman, who is perhaps the most influential economist during the second half of the 20th century. Nobel laureate Friedman believes that an expansion of public debt does little to promote prosperity and could lead to inflation.
Keynes' and Friedman's divergent opinions result from their different views on a government's ability to implement its policies. Keynes believes that governments execute policies very well. Therefore, they can restore people's confidence by raising public debt to promote public construction projects.
Friedman believes governments are poor at implementing policies, and that they often have a fondness for the grandiose -- and therefore increase the money, or M2, supply while raising public debt. He believes that the expansion of public debt will crowd out more competitive private investment, therefore failing to stimulate prosperity. The increased money supply will lead to a steady rise in inflation.
Many people object to this country's government's application of Keynes' theory -- a bill that would allow it to further expand the limits of public debt -- because they doubt the government's ability to efficiently execute its policies.
Two factors lend weight to the objectors' concerns.
First, the government is now adopting a "half-baked" Keynes policy. Keynes believed that the expansion of public debt was effective only when the money was used for public construction projects. However, a main reason for the government to raise public debt at this moment is to cover its tax shortfall of NT$106.6 billion in this fiscal year. This is exactly the kind of remedy that will leave more debt to our children.
Second, the government has repeatedly lifted the ceiling on public debt, regulated by the Public Debt Law (公債法). We can't help but wonder: Is it possible for such an extravagant government to appropriately use the Taiwanese people's hard-earned money?
In a word, although a golden egg can breed a golden hen, the government should strengthen its ability to implement its policies at first, so that it can convince the public about its plan.
Jou Jyh-bang is a professor in the Graduate Institute of National Development at National Taiwan University.
TRANSLATED BY EDDY CHANG
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