Public Purpose Finance: The Government's Role as Lender

Abstract

This Article explores the workings of Public Purpose Finance, and its role within the U.S. political economy. “Public Purpose Finance” (PPF) refers to the broad range of institutions through which the government extends credit to private borrowers in sectors like housing, education, agriculture and small business. At a total of $10 trillion, PPF roughly equals the entire U.S. corporate bond market, and is around one half of the U.S. Gross national debt (2018 figures). The Article begins by surveying and quantifying the scope of PPF. It then demonstrates that PPF enjoys a considerable degree of insulation from the federal budgetary process. The heart of the Article is an attempt to explain the political logic behind the off-budget treatment that PPF enjoys. In a nutshell, while ordinary budget spending is ultimately funded through taxes levied across the tax base, government lending is funded through loan repayment by the borrowers themselves (A model formalizing these claims is available in the Appendix). This off-budget treatment makes PPF a powerful tool for upward mobility, but it also creates a democratic deficit, and has long been a driver of racial inequality. A key theme of the Article is the need to maintain the off-budget treatment, while developing alternative modes of political participation. Government lending, like the budget, should become a key tool for society to formulate its economic agenda.

Keywords: Federal Budget, GSEs, Housing Finance, Racial Inequality, FCRA, Student Loans

JEL Classification: E44, E62, H11, H60, H63, A13