One of life’s great uncertainties is whether we will be remembered after our death, and if so by whom and in what way. For most of us, the best we can hope is that friends and family will think kindly about us once we are gone. To have made a positive impression upon and be well regarded by those who knew us best is no small thing. For a few, records of whose words and deeds will be passed down to posterity, the expectation of lasting fame comes mixed with concern. Will future generations remember them for the great things they achieved, or for some modest act with which they become associated? Will future generations judge them more or less harshly than their contemporaries did? Alfred (d. 899) the Saxon king of England, is now mostly remembered for allowing some cakes to burn, rather than his military victories, his legal and educational reforms, and his scholarship. Richard (d. 1199), the Norman king of England, is celebrated today for his military prowess and piety, whereas the anti-Jewish riots which accompanied his coronation are largely forgotten. Posthumous reputations are beyond the control of those to whom they attach.
Today, David Hume (d. 1776) is considered one of the pre-eminent British philosophers, whose work has greatly influenced not only the course of modern philosophy but also other important areas of social scientific study, notably psychology and economics. During his lifetime, however, he was known primarily as an historian and essayist. His History of England, published in six volumes, was widely discussed during his lifetime but not much today. In a book published in 2008, the Hume scholar Annette Baier (d. 2012) wrote, I have been reading Hume now for sixty years, though it took retirement for me to really read his History of England. Hume’s essays were also popular in his own day, ranging widely in length and subject matter, but mostly concerned with moral, political, and literary matters. Last year, two hundred and eighty years after the first edition of the Essays was published, Oxford University Press issued the first, full critical edition – 1,200 pages in all – including a comprehensive account of the various published versions, with all revisions and deletions included. Despite this new scholarly edition, they remain less familiar to most contemporary philosophers than Hume’s more overtly philosophical writings, which provoked widespread uninterest during his lifetime.
In the second volume of his Essays, first published in January 1742, Hume included a very short piece – fewer than 450 words – entitled, A Character of Sir Robert Walpole. Walpole (d. 1745) was the king’s first minister and is generally acknowledged to be the first person to occupy the position in government that we now call the Prime Minister of Great Britain. He held this role for over twenty years, from 1721 until February 1742, when he was forced to resign. Hume’s essay was, therefore, published just prior to the end of Walpole’s political career and not long before the end of his life. It contains a brief survey of his virtues and vices, both public and private, and concludes: During his time trade has flourished, liberty declined, and learning gone to ruin. As I am a man, I love him; as I am a scholar, I hate him; as I am a Briton, I calmly wish his fall. In the reprinted editions of his Essays, published between 1748 to 1768, Hume moved his text on Walpole to become a footnote to another essay – titled That Politics may be reduced to a Science – and from 1770 the essay was withdrawn completely. Paradoxically, Hume was content to be directly critical of the great politician during his lifetime, but after Walpole’s death he downplayed and then removed his criticisms from print.
It seems that Hume judged that, first out of office and then out of life, Walpole’s reputation should be allowed to recover, since he was no longer in a position to inflict further damage on the life of the nation. Hume wrote: The author is pleased to find, that after animosities are subsided, and calumny has ceased, the whole nation almost have returned to the same moderate sentiments with regard to this great man, if they are not rather becoming more favourable to him, by a very natural transition, from one extreme to another. Here Hume describes the process of mean reversion, later to become an important explanation for the way in which sentiments change, both in politics and financial markets. Hume concludes his addendum to the original essay thus: The author would not oppose those human sentiments towards the dead; though he cannot forbear observing, that the not paying more of our public debts was, as hinted in this character, a great, and the only great, error in that long administration. Notwithstanding his stock deservedly rising in public estimation, Hume cannot forbear to note the one great mistake that Britain’s first – and to this day, the longest-serving – Prime Minister made: he failed to pay back public debt.
Today, the propensity for funding public services by issuing debt, might seems the least criticism we might want to level against our political leaders, especially if we take account of their repeated failures to address the problem of climate change, the corruption of the processes of public appointments, and – endlessly topical – their routine personal dishonesty. Unfortunately, I suspect that Hume was exactly right to qualify his later, more positive assessment of Walpole’s personality and achievements in the way he did. Failing to pay down the national debt is a great error.
When Walpole died, Britain’s national debt as a proportion of its Gross Domestic Product, stood at around 50%. (Note: this ratio measures the total stock of national debt, accumulated over many years, compared with the annual productivity of the national economy, as is an indication of leverage). During the following sixty years, this ratio rose to 200%, due largely to the costs of financing wars, first against the rebellious American colonies and later against the French republicans. Then, for roughly a century the British government paid down its debts, using the profits of the industrial revolution at home and the wealth stolen from the Empire abroad. By 1914, debt stood at only 30% of GDP. Then debt rose sharply again, to finance two world wars, with the ratio peaking at around 250% of GDP in 1945. In the post-war era the combination of public austerity, strong economic activity, and falling interest rates, allowed governments to run regular surpluses and bring debt levels back to below 50% of GDP. Since the mid-1970s, those trends have reversed. Governments have shown themselves willing to spend more on public services than they are willing to raise in taxes: it makes for short-term popularity, but the costs accumulate rapidly. Without fighting any major wars – that is, any necessary wars – the ratio of debt to GDP in Britain today has risen back to around 100%.
Like Hume, I cannot forbear to note that this is a great mistake. Just as savings can be thought of as deferred consumption – I save some money today, so that I can spend it in the future – so government debt can be thought of as deferred taxation: the government borrows money today, which future taxpayers will be required to pay back. For individuals, it is perfectly rational to take advantage of both of savings and debt at different points during their lives. When we are young, we borrow money to finance our education, perhaps some travel, and possibly to buy some property to live in. When we are mid-aged, we are often at our peak earning power, and we can afford gradually to pay back our student loans and our mortgage, and gradually to start to accumulate pension assets, while also enjoying some travel and leisure that consumes the balance of our income. Finally, when we retire, we cease earning money by work, and depend on savings, in the form or pensions or other investments, to fund our living expenses. This, as least, is the idealised model of lifetime credit management that the finance industry promotes. It is a good model for many individuals in modern, wealthy economies; but what makes sense for individuals does not make sense for governments.
National budgets comprise – very roughly – two sorts of expenditures. Current expenses are those used for paying the salaries of state employees, paying for health and education services, paying welfare benefits, paying for the police, the justice system, and the military, and paying for other services that the public demand, such as subsidies for the arts. Then there are other expenses, which are more like capital expenses, that is investment which does not reap an immediate benefit during the current accounting year, but which should generate a stream of benefits into the future. This will include infrastructure projects, such as railways, bridges, airports, and IT networks, and investment funds for research and development, including funding for medical, scientific, and other forms of academic research.
In an ideal world, the government would fund current expenses from taxation, as those paying tax today are the principal beneficiaries of services provided today. Capital expenditure would be funded by debt, with varying maturities and repayment structures, such that the future generations who will mostly benefit from the spending will also pay the costs. Pensions are a special case, which should be pre-funded: payments made by those in work should be saved, in readiness to provide incomes for them once they retire. If governments are very smart, fully funded state pension funds would be eager buyers of national debt, thereby allowing intergenerational savings and debts to be matched.
We do not live in an ideal world. Instead, British governments spend more on current expenses than they can raise in annual taxes and then finance the deficit through new debt. Infrastructure and research are, consequently, under-funded; and our state pension funds mostly not funded at all. In recent years, many economic commentators have dismissed the problem of growing national debt, arguing that interest rates are at historic lows and since governments can borrow for thirty years “almost for free”, they should do so. Except that, even low-interest-bearing debt has to be repaid, or renewed, in thirty years and we have no idea what the economic circumstances will be like in 2050: we know the temperature will be higher, but not much more. I think it fairly safe to assume, however, that future British taxpayers would prefer less debt to refinance, unless it has been used to upgrade the infrastructure they inherited from us.
The British government helpfully provides its citizens with an annual summary of how their taxes are spent and last year, interest payments on national debt came to just over 4% of spending. By comparison, that is only slightly lower than spending on defence or transport, both of which consumed 4.5% of taxes raised. More worryingly, we paid more in debt interest than we spent on housing, the environment, sports, the arts, and museums combined. If we go back four years, we spent over 6% on national debt payments, which equated to half the education budget. So, to put the cost of government borrowing into context, if we had no national debt and no interest payments to fund, we could increase educational spending per child by 50%. For those economists who think that investment in human capital is the principal source of innovation and economic growth, it should be obvious that the annual cost of financing a large national debt does significant long-term damage to our society.
When Hume was on his deathbed, he was visited by his good friend Adam Smith (d. 1790), who reported that Hume was in good spirits and reading a dialogue by the second century satirist Lucian (d. unknown), who was widely read in his own time and in Hume’s day, although his work is not so popular today. In Smith’s account of their final conversation, he said that Hume had recounted an incident in Lucian’s text, in which someone recently deceased arriving at the bank of the River Styx, had tried to persuade Charon to delay his passage across the river to Hades, offering a range of excuses as to why a few further weeks of life were necessary. Hume says that he cannot imagine what excuse he might offer Charon in order to obtain a little delay, since he has done everything of consequence that he ever meant to do. Then, in jest, Hume imagines that he might say: I have been endeavouring to open the eyes of the public. If I live a few years longer, I may have the satisfaction of seeing the downfall of some of the prevailing systems of superstition. To which, Hume supposes Charon would reply: You loitering rogue, that will not happen these many hundred years. Do you fancy I will grant you a lease for so long a term? Get in the boat this instant, you lazy, loitering rogue.
When British Prime Ministers encounter Charon, his boat ready to ferry them to Hades, if any of them ask for a little extra time so as to pay down the national debt, I think we know what the answer will be.
One Reply to “Death and taxes”