ALVIN H. HANSEN
Consultant, Board of Governors
A number of very interesting reflections are brought out in Mr. Wallich's able chapter on "Public Debt and Income Flow." While doubtless it is extremely difficult to make any accurate statistical appraisal of the impact of the debt on the income flow in terms of (a) the distribution of bond holdings, and (b) the tax structure which finances the interest charges, nevertheless I think the attempt made is illuminating. For one thing it stresses a point frequently overlooked, that the net tax burden incident to the public debt is considerably less than the total interest charges in view of the fact that the holders of the bonds will pay a considerable tax (about a billion dollars in 1948) on the interest earnings received. Moreover, in terms of the disposal of the interest payments as between saving and expenditures, the data point to the conclusion that the net deflationary effect of the total transfer from taxpayer to interest recipient is relatively small.
To be sure this conclusion does not take account on the one side of the contractionist effect of the impact of the added net tax burden upon new investment and new industry, nor on the other side of the expansionist effect of increased liquidity and financial security upon the propensity to spend out of current income. After taking account of all factors, I think it is highly probable (and this seems to be the general view one gains from financial writers) that the net effect of a large public debt is likely to prove, on balance, expansionist. Indeed, there is the widespread opinion that the expansionist effect may prove strong enough to develop into general inflation.
In the event of a rather violent restocking boom such as we had after World War I, the high degree of liquidity which the large public debt has given us may indeed contribute to an inflationary development. I believe, however, that the underlying factors following this war point toward pronounced scarcities in special areas (automobiles, household