The Library of Economics and Liberty
Democracy in Deficit: The Political Legacy of Lord Keynes
By James M. Buchanan and Richard E. Wagner
Foreword
Democracy in Deficit, by James M. Buchanan and Richard E. Wagner, represents one of the first comprehensive attempts to apply the basic principles of public choice analysis to macroeconomic theory and policy. 1
*1 Until the 1970s, macroeconomics was devoid of any behavioral content with respect to its treatment of government.
Government was simply treated as an exogenous force which behaved in the way prescribed by a given macroeconomic theory.
In this approach, government invariably acted in the public interest as perceived by the host theory.
Both the so-called Keynesian and monetarist approaches were beset by this problem, although it was the inherent contradictions of the Keynesian theory that attracted the attention of Buchanan and Wagner.
Democracy in Deficit led the way in economics in endogenizing the role of government in discussions of macroeconomic theory and policy.
The central purpose of the book was to examine the simple precepts of Keynesian economics through the lens of public choice theory.
The basic discovery was that Keynesian economics had a bias toward deficits in terms of political self-interest.
That is, at the margin politicians preferred easy choices to hard ones, and this meant lower taxes and higher spending.
Thus, whatever the merits of Keynesian economics in using government fiscal policy to “balance” the forces of inflation and deflation and employment and unemployment in an economy, its application in a democratic setting had severe problems of incentive compatibility; that is, there was a bias toward deficit finance.
And, of course, there is no need to reiterate here the evidence in the United States and elsewhere for the correctness of the Buchanan insight on Keynesian economics.
It is all too apparent that the thesis of this book has been borne out.
Democracy in Deficit led the way to modern work on political business cycles and the incorporation of public choice considerations into macroeconomic theory.
For example, there is a literature today that discusses the issue of the time consistency of economic policy.
Does a conservative incumbent who cannot stand for reelection run a deficit in order to control spending by a liberal successor?
One can easily see the hand of Buchanan in such constructions.
In this example, term limits (a public choice phenomenon) are at the center of a macroeconomic model.
Moreover, monetarism has not escaped the inspection of public choice analysis.
Buchanan and others have pioneered work on the behavior of fiat money monopolists.
This public choice work stands in stark contrast to earlier work by Keynesians and monetarists who supposed that economists stood outside and above politics and offered advice to politicians and central banks that would be automatically adopted.
Otherwise, policymakers were misguided or uninformed.
If they knew the right thing, they would do the right thing.
This approach to macroeconomics is now largely dead, thanks to books like
Democracy in Deficit.
Today, the age-old adage that incentives matter is heeded by macroeconomists, and it is recognized that political incentive — not the ivory tower advice of economists — drives macroeconomic events.
Democracy in Deficit is also closely related to Buchanan’s interest in fiscal and monetary rules to guide long-run policy in macroeconomics.
Such rules are needed to overcome the short-run political incentives analyzed in this book and to provide a stable basis for long-run economic growth.
Buchanan’s lifelong dedication to the goal of a balanced budget amendment to the United States Constitution and to a regime of monetary rules rather than central bank discretion can be seen in this light.
The real alternative to fiscal and monetary rules is, after all, not the perfection of economic policy in some economic theorist’s dream.
It is what the rough and tumble of ordinary politics produces.
The problem is to find a feasible solution to long-run economic stability and growth.
Viewed in this way, there is really no conflict between rules and discretion, and, thanks in part to Buchanan’s insistence on this point, the world today seems poised to have more rule-based economic institutions.
Democracy in Deficit is but one of Buchanan’s many intellectual efforts toward this end.
Robert D. Tollison
University of Mississippi
1998
The analytical core of the argument in Democracy in Deficit is simple and straightforward.
Indeed, the argument is perhaps the single most persuasive application of the elementary theory of public choice, which focuses primary attention on the incentives faced by choosers in varying social roles.
Richard Wagner and I did not sense any purpose of the book beyond that of laying out the elementary propositions along with the implications.
Wagner, as colleague and coauthor, was helpful in placing the concept into its history-of-ideas context, and in his continued insistence that even the simplest arguments must be elaborated to be convincing to skeptics.
Neither Dick Wagner nor I suffer fools gladly, but without our mutually enforcing constraints, a book by either of us would have surely lapsed too readily into polemics.
James M. Buchanan
Fairfax, Virginia
1998
1. James M. Buchanan and Richard E. Wagner, Democracy in Deficit: The Political Legacy of Lord Keynes (New York: Academic Press, 1977), volume 8 in the series.
TO BE CONTINUED ...
THE POLITICAL LEGACY OF LORD KEYNES
Re: THE POLITICAL LEGACY OF LORD KEYNES
The Library of Economics and Liberty
Democracy in Deficit: The Political Legacy of Lord Keynes
By James M. Buchanan and Richard E. Wagner
Preface
The economics of Keynes has been exhaustively discussed, in the popular press, in elementary textbooks, and in learned treatises.
By contrast, the politics of Keynes and Keynesianism has been treated sketchily and indirectly, if at all.
This is surprising, especially in the light of accumulating evidence that tends to support the hypotheses that may be derived from elementary analysis.
Our purpose is to fill this void, at least to the extent of initiating a dialogue.
We shall advance our argument boldly, in part because our central objective is to introduce a different aspect of Keynesianism for critical analysis.
Those who feel obligated to respond to our prescriptive diagnosis of economic-political reality must do so by taking into account elements that have hitherto been left unexamined.
The book is concerned, firstly, with the impact of economic ideas on political institutions, and, secondly, with the effects of these derived institutional changes on economic policy decisions.
This approach must be distinguished from that which describes orthodox normative economics.
In the latter, the economist provides policy advice and counsel in terms of preferred or optimal results.
He does not bother with the transmission of this counsel through the processes of political choice.
Nor does he consider the potential influence that his normative suggestions may exert on the basic institutions of politics and, through this influence, in turn, on the results that are generated.
To the extent that observed events force him to acknowledge some such influence of ideas on institutions, and of institutions on ideas, the orthodox economist is ready to fault the public and the politicians for failures to cut through the institutional haze.
Whether they do so or not, members of the public “should” see the world as the economist sees it.
We reject this set of blindfolds.
We step back one stage, and we try to observe the political along with the economic process.
We look at the political economy.
The prescriptive diagnosis that emerges suggests disease in the political structure as it responds to the Keynesian teachings about economic policy.
Our specific hypothesis is that the Keynesian theory of economic policy produces inherent biases when applied within the institutions of political democracy.
To the extent that this hypothesis is accepted, the search for improvement must be centered on modification in the institutional structure.
We cannot readily offer new advice to politicians while at the same time offering predictions as to how these same politicians will behave under existing institutional constraints.
By necessity, we must develop a positive theory of how politics works, of public choice, before we can begin to make suggestions for institutional reform.
In our considered judgment, the historical record corroborates the elementary hypotheses that emerge from our analysis.
For this reason, we have found it convenient to organize the first part of this book as a history of how ideas developed and exerted their influence on institutions.
We should emphasize, however, that the acceptability of our basic analysis does not require that the fiscal record be interpreted in our terms.
Those whose natural bent is more Panglossian may explain the observed record differently, while at the same time acknowledging that our analysis does isolate biases in the fiscal decision processes, biases which, in this view, would remain more potential than real.
Some may interpret our argument to be unduly alarmist.
We hope that events will prove them right.
As noted, we are pessimistic about both the direction and the speed of change.
But we are not fatalists.
This book is written in our faith in the ability of Americans to shape their own destiny.
We hope that the consequences predicted by the logic of our argument will not, in fact, occur, that our conditional predictions will be refuted, and that institutions will be changed.
Indeed, we should like to consider this book to be an early part of a dialogue that will result indirectly in the destruction of its more positive arguments.
We offer our thoughts on Keynesianism and the survival of democratic values in the hope that our successors a century hence will look on the middle years of the twentieth century as an episodic and dangerous detour away from the basic stability that must be a necessary element in the American dream itself.
Our analysis is limited to the impact of Keynesian ideas on the United States structure of political decision making.
The “political legacy” in our subtitle should, strictly speaking, be prefaced by the word “American.”
We have not tried to incorporate a discussion of Keynesian influences on the political history of other nations, notably that of Great Britain.
Such a discussion would be valuable in itself, and the comparative results would be highly suggestive.
But this extension is a task for others; we have chosen explicitly to restrict our own treatment to the political economy that we know best.
TO BE CONTINUED ...
Democracy in Deficit: The Political Legacy of Lord Keynes
By James M. Buchanan and Richard E. Wagner
Preface
The economics of Keynes has been exhaustively discussed, in the popular press, in elementary textbooks, and in learned treatises.
By contrast, the politics of Keynes and Keynesianism has been treated sketchily and indirectly, if at all.
This is surprising, especially in the light of accumulating evidence that tends to support the hypotheses that may be derived from elementary analysis.
Our purpose is to fill this void, at least to the extent of initiating a dialogue.
We shall advance our argument boldly, in part because our central objective is to introduce a different aspect of Keynesianism for critical analysis.
Those who feel obligated to respond to our prescriptive diagnosis of economic-political reality must do so by taking into account elements that have hitherto been left unexamined.
The book is concerned, firstly, with the impact of economic ideas on political institutions, and, secondly, with the effects of these derived institutional changes on economic policy decisions.
This approach must be distinguished from that which describes orthodox normative economics.
In the latter, the economist provides policy advice and counsel in terms of preferred or optimal results.
He does not bother with the transmission of this counsel through the processes of political choice.
Nor does he consider the potential influence that his normative suggestions may exert on the basic institutions of politics and, through this influence, in turn, on the results that are generated.
To the extent that observed events force him to acknowledge some such influence of ideas on institutions, and of institutions on ideas, the orthodox economist is ready to fault the public and the politicians for failures to cut through the institutional haze.
Whether they do so or not, members of the public “should” see the world as the economist sees it.
We reject this set of blindfolds.
We step back one stage, and we try to observe the political along with the economic process.
We look at the political economy.
The prescriptive diagnosis that emerges suggests disease in the political structure as it responds to the Keynesian teachings about economic policy.
Our specific hypothesis is that the Keynesian theory of economic policy produces inherent biases when applied within the institutions of political democracy.
To the extent that this hypothesis is accepted, the search for improvement must be centered on modification in the institutional structure.
We cannot readily offer new advice to politicians while at the same time offering predictions as to how these same politicians will behave under existing institutional constraints.
By necessity, we must develop a positive theory of how politics works, of public choice, before we can begin to make suggestions for institutional reform.
In our considered judgment, the historical record corroborates the elementary hypotheses that emerge from our analysis.
For this reason, we have found it convenient to organize the first part of this book as a history of how ideas developed and exerted their influence on institutions.
We should emphasize, however, that the acceptability of our basic analysis does not require that the fiscal record be interpreted in our terms.
Those whose natural bent is more Panglossian may explain the observed record differently, while at the same time acknowledging that our analysis does isolate biases in the fiscal decision processes, biases which, in this view, would remain more potential than real.
Some may interpret our argument to be unduly alarmist.
We hope that events will prove them right.
As noted, we are pessimistic about both the direction and the speed of change.
But we are not fatalists.
This book is written in our faith in the ability of Americans to shape their own destiny.
We hope that the consequences predicted by the logic of our argument will not, in fact, occur, that our conditional predictions will be refuted, and that institutions will be changed.
Indeed, we should like to consider this book to be an early part of a dialogue that will result indirectly in the destruction of its more positive arguments.
We offer our thoughts on Keynesianism and the survival of democratic values in the hope that our successors a century hence will look on the middle years of the twentieth century as an episodic and dangerous detour away from the basic stability that must be a necessary element in the American dream itself.
Our analysis is limited to the impact of Keynesian ideas on the United States structure of political decision making.
The “political legacy” in our subtitle should, strictly speaking, be prefaced by the word “American.”
We have not tried to incorporate a discussion of Keynesian influences on the political history of other nations, notably that of Great Britain.
Such a discussion would be valuable in itself, and the comparative results would be highly suggestive.
But this extension is a task for others; we have chosen explicitly to restrict our own treatment to the political economy that we know best.
TO BE CONTINUED ...
Re: THE POLITICAL LEGACY OF LORD KEYNES
The Library of Economics and Liberty
Democracy in Deficit: The Political Legacy of Lord Keynes, continued ...
By James M. Buchanan and Richard E. Wagner
Part I. What Happened?
Chapter 1 What Hath Keynes Wrought?
In the year (1776) of the American Declaration of Independence, Adam Smith observed that “What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom.”
Until the advent of the “Keynesian revolution” in the middle years of this century, the fiscal conduct of the American Republic was informed by this Smithian principle of fiscal responsibility: Government should not spend without imposing taxes; and government should not place future generations in bondage by deficit financing of public outlays designed to provide temporary and short-lived benefits.
With the completion of the Keynesian revolution, these time-tested principles of fiscal responsibility were consigned to the heap of superstitious nostrums that once stifled enlightened political-fiscal activism.
Keynesianism stood the Smithian analogy on its head.
The stress was placed on the differences rather than the similarities between a family and the state, and notably with respect to principles of prudent fiscal conduct.
The state was no longer to be conceived in the image of the family, and the rules of prudent fiscal conduct differed dramatically as between the two institutions.
The message of Keynesianism might be summarized as: What is folly in the conduct of a private family may be prudence in the conduct of the affairs of a great nation.
“We are all Keynesians now.”
This was a familiar statement in the 1960s, attributed even to the likes of Milton Friedman among the academicians and to Richard Nixon among the politicians.
Yet it takes no scientific talent to observe that ours is not an economic paradise.
During the post-Keynesian, post-1960 era, we have labored under continuing and increasing budget deficits, a rapidly growing governmental sector, high unemployment, apparently permanent and perhaps increasing inflation, and accompanying disenchantment with the American sociopolitical order.
This is not as it was supposed to be.
After Walter Heller’s finest hours in 1963, fiscal wisdom was to have finally triumphed over fiscal folly.
The national economy was to have settled down on or near its steady growth potential, onward and upward toward better things, public and private.
The spirit of optimism was indeed contagious, so much so that economic productivity and growth, the announced objectives for the post-Sputnik, post-Eisenhower years, were soon abandoned, to be replaced by the redistributionist zeal of Lyndon Johnson’s “Great Society” and by the no-growth implications of Ralph Nader, the Sierra Club, Common Cause, and Edmund Muskie’s Environmental Protection Agency.
Having mastered the management of the national economy, the policy planners were to have moved on to quality-of-life issues.
The “Great Society” was to become real.
What happened?
Why does Camelot lie in ruin?
Viet Nam and Watergate cannot explain everything forever.
Intellectual error of monumental proportion has been made, and not exclusively by the ordinary politicians.
Error also lies squarely with the economists.
The academic scribbler of the past who must bear substantial responsibility is Lord Keynes himself, whose ideas were uncritically accepted by American establishment economists.
The mounting historical evidence of the effects of these ideas cannot continue to be ignored.
Keynesian economics has turned the politicians loose; it has destroyed the effective constraint on politicians’ ordinary appetites.
Armed with the Keynesian message, politicians can spend and spend without the apparent necessity to tax.
“Democracy in deficit” is descriptive, both of our economic plight and of the subject matter for this book.
TO BE CONTINUED ...
Democracy in Deficit: The Political Legacy of Lord Keynes, continued ...
By James M. Buchanan and Richard E. Wagner
Part I. What Happened?
Chapter 1 What Hath Keynes Wrought?
In the year (1776) of the American Declaration of Independence, Adam Smith observed that “What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom.”
Until the advent of the “Keynesian revolution” in the middle years of this century, the fiscal conduct of the American Republic was informed by this Smithian principle of fiscal responsibility: Government should not spend without imposing taxes; and government should not place future generations in bondage by deficit financing of public outlays designed to provide temporary and short-lived benefits.
With the completion of the Keynesian revolution, these time-tested principles of fiscal responsibility were consigned to the heap of superstitious nostrums that once stifled enlightened political-fiscal activism.
Keynesianism stood the Smithian analogy on its head.
The stress was placed on the differences rather than the similarities between a family and the state, and notably with respect to principles of prudent fiscal conduct.
The state was no longer to be conceived in the image of the family, and the rules of prudent fiscal conduct differed dramatically as between the two institutions.
The message of Keynesianism might be summarized as: What is folly in the conduct of a private family may be prudence in the conduct of the affairs of a great nation.
“We are all Keynesians now.”
This was a familiar statement in the 1960s, attributed even to the likes of Milton Friedman among the academicians and to Richard Nixon among the politicians.
Yet it takes no scientific talent to observe that ours is not an economic paradise.
During the post-Keynesian, post-1960 era, we have labored under continuing and increasing budget deficits, a rapidly growing governmental sector, high unemployment, apparently permanent and perhaps increasing inflation, and accompanying disenchantment with the American sociopolitical order.
This is not as it was supposed to be.
After Walter Heller’s finest hours in 1963, fiscal wisdom was to have finally triumphed over fiscal folly.
The national economy was to have settled down on or near its steady growth potential, onward and upward toward better things, public and private.
The spirit of optimism was indeed contagious, so much so that economic productivity and growth, the announced objectives for the post-Sputnik, post-Eisenhower years, were soon abandoned, to be replaced by the redistributionist zeal of Lyndon Johnson’s “Great Society” and by the no-growth implications of Ralph Nader, the Sierra Club, Common Cause, and Edmund Muskie’s Environmental Protection Agency.
Having mastered the management of the national economy, the policy planners were to have moved on to quality-of-life issues.
The “Great Society” was to become real.
What happened?
Why does Camelot lie in ruin?
Viet Nam and Watergate cannot explain everything forever.
Intellectual error of monumental proportion has been made, and not exclusively by the ordinary politicians.
Error also lies squarely with the economists.
The academic scribbler of the past who must bear substantial responsibility is Lord Keynes himself, whose ideas were uncritically accepted by American establishment economists.
The mounting historical evidence of the effects of these ideas cannot continue to be ignored.
Keynesian economics has turned the politicians loose; it has destroyed the effective constraint on politicians’ ordinary appetites.
Armed with the Keynesian message, politicians can spend and spend without the apparent necessity to tax.
“Democracy in deficit” is descriptive, both of our economic plight and of the subject matter for this book.
TO BE CONTINUED ...
Re: THE POLITICAL LEGACY OF LORD KEYNES
The Library of Economics and Liberty
Democracy in Deficit: The Political Legacy of Lord Keynes, continued ...
By James M. Buchanan and Richard E. Wagner
Part I. What Happened?
Chapter 1 What Hath Keynes Wrought?
The Political Economy
This book is an essay in political economy rather than in economic theory.
Our focus is upon the political institutions through which economic policy must be implemented, policy which is, itself, ultimately derived from theory, good or bad.
And central to our argument is the principle that the criteria for good theory are necessarily related to the political institutions of the society.
The ideal normative theory of economic management for an authoritarian regime may fail completely for a regime that embodies participation by those who are to be managed.
This necessary linkage or interdependence between the basic political structure of society and the economic theory of policy has never been properly recognized by economists, despite its elementary logic and its overwhelming empirical apparency.
Our critique of Keynesianism is concentrated on its political presuppositions, not on its internal theoretical structure.
It is as if someone tried to make a jet engine operate by using the theory of the piston-driven machine.
Nothing need be wrong with the theory save that it is wholly misapplied.
This allows us largely but not completely to circumvent the troublesome and sometimes complex analyses in modern macroeconomic and monetary theory.
This does not imply, however, that the applicable theory, that which is fully appropriate to the political institutions of a functioning democratic society, is simple and straightforward or, indeed, that this theory has been fully developed.
Our discussion provides the setting within which such a theory might be pursued, and our plea is for economists to begin to think in terms of the political structure that we observe.
But before this step can be taken, we must somehow reach agreement on the elements of the political decision process, on the model for policy making, to which any theory of policy is to be applied.
At this point, values cannot be left aside.
If the Keynesian policy precepts for national economic management have failed, there are two ways of reacting.
We may place the blame squarely on the vagaries of democratic politics, and propose that democratic decision making be replaced by more authoritarian rule.
Or, alternatively, we can reject the applicability of the policy precepts in democratic structure, and try to invent and apply policy principles that are consistent with such structure.
We choose the latter. 2
Our values dictate the democratic decision-making institutions should be maintained and that, to this end, inapplicable economic theories should be discarded as is necessary.
If we observe democracy in deficit, we wish to repair the “deficit” part of this description, not to discard the “democracy” element.
TO BE CONTINUED ...
Democracy in Deficit: The Political Legacy of Lord Keynes, continued ...
By James M. Buchanan and Richard E. Wagner
Part I. What Happened?
Chapter 1 What Hath Keynes Wrought?
The Political Economy
This book is an essay in political economy rather than in economic theory.
Our focus is upon the political institutions through which economic policy must be implemented, policy which is, itself, ultimately derived from theory, good or bad.
And central to our argument is the principle that the criteria for good theory are necessarily related to the political institutions of the society.
The ideal normative theory of economic management for an authoritarian regime may fail completely for a regime that embodies participation by those who are to be managed.
This necessary linkage or interdependence between the basic political structure of society and the economic theory of policy has never been properly recognized by economists, despite its elementary logic and its overwhelming empirical apparency.
Our critique of Keynesianism is concentrated on its political presuppositions, not on its internal theoretical structure.
It is as if someone tried to make a jet engine operate by using the theory of the piston-driven machine.
Nothing need be wrong with the theory save that it is wholly misapplied.
This allows us largely but not completely to circumvent the troublesome and sometimes complex analyses in modern macroeconomic and monetary theory.
This does not imply, however, that the applicable theory, that which is fully appropriate to the political institutions of a functioning democratic society, is simple and straightforward or, indeed, that this theory has been fully developed.
Our discussion provides the setting within which such a theory might be pursued, and our plea is for economists to begin to think in terms of the political structure that we observe.
But before this step can be taken, we must somehow reach agreement on the elements of the political decision process, on the model for policy making, to which any theory of policy is to be applied.
At this point, values cannot be left aside.
If the Keynesian policy precepts for national economic management have failed, there are two ways of reacting.
We may place the blame squarely on the vagaries of democratic politics, and propose that democratic decision making be replaced by more authoritarian rule.
Or, alternatively, we can reject the applicability of the policy precepts in democratic structure, and try to invent and apply policy principles that are consistent with such structure.
We choose the latter. 2
Our values dictate the democratic decision-making institutions should be maintained and that, to this end, inapplicable economic theories should be discarded as is necessary.
If we observe democracy in deficit, we wish to repair the “deficit” part of this description, not to discard the “democracy” element.
TO BE CONTINUED ...
Re: THE POLITICAL LEGACY OF LORD KEYNES
The Library of Economics and Liberty
Democracy in Deficit: The Political Legacy of Lord Keynes, continued ...
By James M. Buchanan and Richard E. Wagner
Part I. What Happened?
Chapter 1 What Hath Keynes Wrought?
A Review of the Record
We challenge the Keynesian theory of economic policy in this book.
Our challenge will stand or fall upon the ability of our argument to persuade.
There are two strings to our bow.
We must first review both the pre-Keynesian and the post-Keynesian record.
Forty years of history offers us a basis for at least preliminary assessment.
We shall look carefully at the fiscal activities of the United States government before the Great Depression of the 1930s, before the publication of Keynes’
General Theory. 3
The simple facts of budget balance or imbalance are important here, and these will not be neglected in the discussion of Chapter 2.
More importantly for our purposes, however, we must try to determine the “principles” for budget making that informed the political decision makers.
What precepts for “fiscal responsibility” were implicit in their behavior?
How influential was the simple analogy between the individual and the government financial account?
How did the balanced-budget norm act to constrain spending proclivities of politicians and parties?
There was no full-blown Keynesian “revolution” in the 1930s.
The American acceptance of Keynesian ideas proceeded step by step from the Harvard economists, to economists in general, to the journalists, and, finally, to the politicians in power.
This gradual spread of Keynesian notions, as well as the accompanying demise of the old-fashioned principles for financial responsibility, is documented in Chapters 3 and 4.
The Keynesian brigades first had to storm the halls of ivy, for only then would they have a base from which to capture the minds of the public and the halls of Congress.
Chapter 3 documents the triumph of Keynesianism throughout the groves of academe, while Chapter 4 describes the infusion of Keynesianism into the general consciousness of the body politic — its emergence as an element of our general cultural climate.
Even if our review of the historical record is convincing, no case is established for raising the alarm.
What is of such great moment if elected politicians do respond to the Keynesian messages in somewhat biased manner?
What is there about budget deficits to arouse concern?
How can the burden of debt be passed along to our grandchildren?
Is inflation the monster that it is sometimes claimed to be?
Why not learn to live with it, especially if unemployment can be kept within bounds?
If Keynesian economics has and can secure high-level employment, why not give it the highest marks, even when recognizing its by-product generation of inflation and relatively expanding government?
These are the questions that require serious analysis and discussion, because these are the questions that most economists would ask of us; they are explored in Chapter 5.
TO BE CONTINUED ...
Democracy in Deficit: The Political Legacy of Lord Keynes, continued ...
By James M. Buchanan and Richard E. Wagner
Part I. What Happened?
Chapter 1 What Hath Keynes Wrought?
A Review of the Record
We challenge the Keynesian theory of economic policy in this book.
Our challenge will stand or fall upon the ability of our argument to persuade.
There are two strings to our bow.
We must first review both the pre-Keynesian and the post-Keynesian record.
Forty years of history offers us a basis for at least preliminary assessment.
We shall look carefully at the fiscal activities of the United States government before the Great Depression of the 1930s, before the publication of Keynes’
General Theory. 3
The simple facts of budget balance or imbalance are important here, and these will not be neglected in the discussion of Chapter 2.
More importantly for our purposes, however, we must try to determine the “principles” for budget making that informed the political decision makers.
What precepts for “fiscal responsibility” were implicit in their behavior?
How influential was the simple analogy between the individual and the government financial account?
How did the balanced-budget norm act to constrain spending proclivities of politicians and parties?
There was no full-blown Keynesian “revolution” in the 1930s.
The American acceptance of Keynesian ideas proceeded step by step from the Harvard economists, to economists in general, to the journalists, and, finally, to the politicians in power.
This gradual spread of Keynesian notions, as well as the accompanying demise of the old-fashioned principles for financial responsibility, is documented in Chapters 3 and 4.
The Keynesian brigades first had to storm the halls of ivy, for only then would they have a base from which to capture the minds of the public and the halls of Congress.
Chapter 3 documents the triumph of Keynesianism throughout the groves of academe, while Chapter 4 describes the infusion of Keynesianism into the general consciousness of the body politic — its emergence as an element of our general cultural climate.
Even if our review of the historical record is convincing, no case is established for raising the alarm.
What is of such great moment if elected politicians do respond to the Keynesian messages in somewhat biased manner?
What is there about budget deficits to arouse concern?
How can the burden of debt be passed along to our grandchildren?
Is inflation the monster that it is sometimes claimed to be?
Why not learn to live with it, especially if unemployment can be kept within bounds?
If Keynesian economics has and can secure high-level employment, why not give it the highest marks, even when recognizing its by-product generation of inflation and relatively expanding government?
These are the questions that require serious analysis and discussion, because these are the questions that most economists would ask of us; they are explored in Chapter 5.
TO BE CONTINUED ...
Re: THE POLITICAL LEGACY OF LORD KEYNES
The Library of Economics and Liberty
Democracy in Deficit: The Political Legacy of Lord Keynes, continued ...
By James M. Buchanan and Richard E. Wagner
Part I. What Happened?
Chapter 1 What Hath Keynes Wrought?
The Theory of Public Choice
Our second instrument of persuasion is a theory for decision making in democracy, a theory of public choice, which was so long neglected by economists.
This is developed in Chapters 6 through 9.
Keynes was not a democrat, but, rather, looked upon himself as a potential member of an enlightened ruling elite.
Political institutions were largely irrelevant for the formulation of his policy presumptions.
The application of the Keynesian precepts within a working political democracy, however, would often require politicians to undertake actions that would reduce their prospects for survival.
Should we then be surprised that the Keynesian democratic political institutions will produce policy responses contrary to those that would be forthcoming from some idealized application of the norms in the absence of political feedback?
In Chapter 7, it is shown that ordinary political representatives in positions of either legislative or executive authority will behave quite differently when confronted with taxing and spending alternatives than would their benevolently despotic counterparts, those whom Keynes viewed as making policy, whose behavior is examined in Chapter 6.
In Chapter 8, the analysis of Chapter 7 is extended to the behavior of monetary authorities, and monetary decisions are considered as endogenous rather than as exogenous variables.
A crucial feature of our argument is the ability of political and fiscal institutions to influence the outcomes of political processes, a subject that we explore in Chapter 9.
Institutions matter in our analysis.
While this position is generally accepted by those who call themselves “Keynesians,” it is disputed by many of those who consider themselves “anti-” or “non-Keynesians.”
These latter analysts argue that institutions are generally irrelevant.
With respect to institutions, we are like the Keynesians, for we do not let an infatuation with abstract models destroy our sense of reality.
Instead, we accept the proposition that institutions, like ideas, have consequences that are not at all obvious at the time of their inception, a point that Richard Weaver noted so memorably. 4
At the same time, however, our view of the nature of a free-enterprise economic order is distinctly non-Keynesian, although “Keynesianism” must to some extent be distinguished from the “economics of Keynes.” 5
The theory of public choice discussed in Chapters 6-9 is not at all complex, and it offers satisfactory explanations of the post-Keynesian fiscal record.
The Keynesian defense must be, however, that the theory is indeed too simplistic, that politicians can and will behave differently from the predictions of the theory.
We do not, of course, rule out the ability of politicians, intelligent persons all, to learn the Keynesian lessons.
But will the voters - citizens, who determine who their political representatives will be, accept the proffered wisdom?
This is a tougher question, and the familiar call for more economic education of the public has long since become a tiresome relic.
The Keynesian who relies on a more sophisticated electorate to reverse the accumulating record leans on a frail reed.
TO BE CONTINUED ...
Democracy in Deficit: The Political Legacy of Lord Keynes, continued ...
By James M. Buchanan and Richard E. Wagner
Part I. What Happened?
Chapter 1 What Hath Keynes Wrought?
The Theory of Public Choice
Our second instrument of persuasion is a theory for decision making in democracy, a theory of public choice, which was so long neglected by economists.
This is developed in Chapters 6 through 9.
Keynes was not a democrat, but, rather, looked upon himself as a potential member of an enlightened ruling elite.
Political institutions were largely irrelevant for the formulation of his policy presumptions.
The application of the Keynesian precepts within a working political democracy, however, would often require politicians to undertake actions that would reduce their prospects for survival.
Should we then be surprised that the Keynesian democratic political institutions will produce policy responses contrary to those that would be forthcoming from some idealized application of the norms in the absence of political feedback?
In Chapter 7, it is shown that ordinary political representatives in positions of either legislative or executive authority will behave quite differently when confronted with taxing and spending alternatives than would their benevolently despotic counterparts, those whom Keynes viewed as making policy, whose behavior is examined in Chapter 6.
In Chapter 8, the analysis of Chapter 7 is extended to the behavior of monetary authorities, and monetary decisions are considered as endogenous rather than as exogenous variables.
A crucial feature of our argument is the ability of political and fiscal institutions to influence the outcomes of political processes, a subject that we explore in Chapter 9.
Institutions matter in our analysis.
While this position is generally accepted by those who call themselves “Keynesians,” it is disputed by many of those who consider themselves “anti-” or “non-Keynesians.”
These latter analysts argue that institutions are generally irrelevant.
With respect to institutions, we are like the Keynesians, for we do not let an infatuation with abstract models destroy our sense of reality.
Instead, we accept the proposition that institutions, like ideas, have consequences that are not at all obvious at the time of their inception, a point that Richard Weaver noted so memorably. 4
At the same time, however, our view of the nature of a free-enterprise economic order is distinctly non-Keynesian, although “Keynesianism” must to some extent be distinguished from the “economics of Keynes.” 5
The theory of public choice discussed in Chapters 6-9 is not at all complex, and it offers satisfactory explanations of the post-Keynesian fiscal record.
The Keynesian defense must be, however, that the theory is indeed too simplistic, that politicians can and will behave differently from the predictions of the theory.
We do not, of course, rule out the ability of politicians, intelligent persons all, to learn the Keynesian lessons.
But will the voters - citizens, who determine who their political representatives will be, accept the proffered wisdom?
This is a tougher question, and the familiar call for more economic education of the public has long since become a tiresome relic.
The Keynesian who relies on a more sophisticated electorate to reverse the accumulating record leans on a frail reed.
TO BE CONTINUED ...
Re: THE POLITICAL LEGACY OF LORD KEYNES
The Library of Economics and Liberty
Democracy in Deficit: The Political Legacy of Lord Keynes, continued ...
By James M. Buchanan and Richard E. Wagner
Part I. What Happened?
Chapter 1 What Hath Keynes Wrought?
Fiscal and Monetary Reform
In the last three chapters of the book, we return to what may be considered the main theme.
Even the ardent Keynesians recognized, quite early, that some replacement for the fiscal rule of balanced budgets might be required as guidance for even the enlightened politicians.
In Chapter 10, we examine the alternative rules for fiscal responsibility that have been advanced and used in the discussion of fiscal and budgetary policy.
These include the rule for budget balance over the business cycle, and, more importantly, the rule for budget balance at full employment which continues to inform the official economic pronouncements from Washington, even if it is largely disregarded in practice.
Chapter 11 represents our response to what will seem to many to be our most vulnerable point.
What about unemployment?
Our criticism of the implications of the Keynesian teachings may be widely accepted, up to a point.
But how are we to respond to the argument that the maintenance of high-level employment is the overriding objective for national economic policy, and that only the Keynesian teachings offer resolution?
These questions inform this chapter, in which we question the foundations of such prevalent attitudes.
Chapter 12 offers our own substantive proposals for fiscal and monetary reform.
Our emphasis here is on the necessity that the reforms introduced be treated as genuine constitutional measures, rules that are designed to constrain the short-run expedient behavior of politicians.
Our emphasis here is in the long-range nature of reform, rather than on the details of particular proposals.
To avoid charges of incompleteness and omission, however, we advance explicit suggestions for constitutional change, and notably for the adoption of a constitutional amendment requiring budget balance.
2. For a formulation of this choice alternative in a British context, see Robin Pringle, “Britain Hesitates before an Ineluctable Choice,” Banker 125 (May 1975): 493-496.
3. John Maynard Keynes, The General Theory of Employment, Interest, and Money (New York: Harcourt, Brace, 1936).
4. See Richard M. Weaver, Ideas Have Consequences (Chicago: University of Chicago Press, 1948).
5. See Axel Leijonhufvud, On Keynesian Economics and the Economics of Keynes (London: Oxford University Press, 1968); and G. L. S. Shackle, “Keynes and Today’s Establishment in Economic Theory: A View,” Journal of Economic Literature 11 (June 1973): 516-519. A somewhat different perspective is presented in Leland B. Yeager, “The Keynesian Diversion,” Western Economic Journal 11 (June 1973): 150-163.
TO BE CONTINUED ...
Democracy in Deficit: The Political Legacy of Lord Keynes, continued ...
By James M. Buchanan and Richard E. Wagner
Part I. What Happened?
Chapter 1 What Hath Keynes Wrought?
Fiscal and Monetary Reform
In the last three chapters of the book, we return to what may be considered the main theme.
Even the ardent Keynesians recognized, quite early, that some replacement for the fiscal rule of balanced budgets might be required as guidance for even the enlightened politicians.
In Chapter 10, we examine the alternative rules for fiscal responsibility that have been advanced and used in the discussion of fiscal and budgetary policy.
These include the rule for budget balance over the business cycle, and, more importantly, the rule for budget balance at full employment which continues to inform the official economic pronouncements from Washington, even if it is largely disregarded in practice.
Chapter 11 represents our response to what will seem to many to be our most vulnerable point.
What about unemployment?
Our criticism of the implications of the Keynesian teachings may be widely accepted, up to a point.
But how are we to respond to the argument that the maintenance of high-level employment is the overriding objective for national economic policy, and that only the Keynesian teachings offer resolution?
These questions inform this chapter, in which we question the foundations of such prevalent attitudes.
Chapter 12 offers our own substantive proposals for fiscal and monetary reform.
Our emphasis here is on the necessity that the reforms introduced be treated as genuine constitutional measures, rules that are designed to constrain the short-run expedient behavior of politicians.
Our emphasis here is in the long-range nature of reform, rather than on the details of particular proposals.
To avoid charges of incompleteness and omission, however, we advance explicit suggestions for constitutional change, and notably for the adoption of a constitutional amendment requiring budget balance.
2. For a formulation of this choice alternative in a British context, see Robin Pringle, “Britain Hesitates before an Ineluctable Choice,” Banker 125 (May 1975): 493-496.
3. John Maynard Keynes, The General Theory of Employment, Interest, and Money (New York: Harcourt, Brace, 1936).
4. See Richard M. Weaver, Ideas Have Consequences (Chicago: University of Chicago Press, 1948).
5. See Axel Leijonhufvud, On Keynesian Economics and the Economics of Keynes (London: Oxford University Press, 1968); and G. L. S. Shackle, “Keynes and Today’s Establishment in Economic Theory: A View,” Journal of Economic Literature 11 (June 1973): 516-519. A somewhat different perspective is presented in Leland B. Yeager, “The Keynesian Diversion,” Western Economic Journal 11 (June 1973): 150-163.
TO BE CONTINUED ...
Re: THE POLITICAL LEGACY OF LORD KEYNES
The Library of Economics and Liberty
Democracy in Deficit: The Political Legacy of Lord Keynes, continued ...
By James M. Buchanan and Richard E. Wagner
Chapter 2 - The Old-Time Fiscal Religion
Classical Fiscal Principle
The history of both fiscal principle and fiscal practice may reasonably be divided into pre- and post-Keynesian periods.
The Keynesian breakpoint is stressed concisely by Hugh Dalton, the textbook writer whose own political career was notoriously brief.
In the post-Keynesian editions of his Principles of Public Finance, Dalton said:
The new approach to budgetary policy owes more to Keynes than to any other man.
Thus it is just that we should speak of “the Keynesian revolution.”
… We may now free ourselves from the old and narrow conception of balancing the budget, no matter over what period, and move towards the new and wider conception of balancing the whole economy. 6
In this chapter, we shall examine briefly the pre-Keynesian history, in terms of both the articulation of fiscal principle and the implementation of fiscal practice.
As noted at the beginning of Chapter 1, the pre-Keynesian or “classical” principles can perhaps best be summarized in the analogy between the state and the family.
Prudent financial conduct by the government was conceived in basically the same image as that by the family or the firm.
Frugality, not profligacy, was accepted as the cardinal virtue, and this norm assumed practical shape in the widely shared principle that public budgets should be in balance, if not in surplus, and that deficits were to be tolerated only in extraordinary circumstances.
Substantial and continuing deficits were interpreted as the mark of fiscal folly.
Principles of sound business practice were also held relevant to the fiscal affairs of government.
When capital expenditures were financed by debt, sinking funds for amortization were to be established and maintained.
The substantial attention paid to the use and operation of sinking funds in the fiscal literature during the whole pre-Keynesian era attests to the strength with which these basic classical principles were held. 7
Textbooks and treatises embodied the noncontroverted principle that public budgets should be in balance.
C. F. Bastable, one of the leading public-finance scholars of the late nineteenth and early twentieth centuries, in commenting on “The Relation of Expenditure and Receipts,” suggested that under normal conditions, there ought to be a balance between these two sides [expenditure and revenue] of financial activity.
Outlay should not exceed income, … tax revenue ought to be kept up to the amount required to defray expenses. 8
Bastable recognized the possibility of extenuating circumstances, which led him to modify his statement of the principle of budget balance by stating:
This general principle must, however, admit of modifications.
Temporary deficits and surpluses cannot be avoided….
All that can be claimed is a substantial approach to a balance in the two sides of the account.
The safest rule for practice is that which lays down the expediency of estimating for a moderate surplus, by which the possibility of a deficit will be reduced to a minimum.9
Classical or pre-Keynesian fiscal principles, in other words, supported a budget surplus during normal times so as to provide a cushion for more troublesome periods.
And similar statements can be found throughout the pre-Keynesian fiscal literature.10
Aside from the simple, and basically intuitive, analogy drawn between governments and individuals and business firms, these rules for “sound finance” were reinforced by two distinct analytical principles, only one of which was made explicit in the economic policy analysis of the period.
The dominant principle (one that was expressed clearly by Adam Smith and incorporated into the theory of economic policy) was that resort to debt finance by government provided evidence of public profligacy, and, furthermore, a form of profligacy that imposed fiscal burdens on subsequent taxpayers.
Put starkly, debt finance enabled people living currently to enrich themselves at the expense of people living in the future.
These notions about debt finance, which were undermined by the Keynesian revolution, reinforced adherence to a balanced-budget principle of fiscal conduct.
We shall describe these principles of debt finance and debt burden more carefully in a subsequent section of this chapter.
A second analytical principle emerged more than a century after Smith’s Wealth of Nations, and it was not explicitly incorporated into the norms for policy.
But it may have been implicitly recognized.
It is important because it reinforces the classical principles from a different and essentially political or public-choice perspective.
In 1896, Knut Wicksell noted that an individual could make an informed, rational assessment of various proposals for public expenditure only if he were confronted with a tax bill at the same time.11
Moreover, to facilitate such comparison, Wicksell suggested that the total costs of any proposed expenditure program should be apportioned among the individual members of the political community.
These were among the institutional features that he thought necessary to make reasonably efficient fiscal decisions in a democracy.
Effective democratic government requires institutional arrangements that force citizens to take account of the costs of government as well as the benefits, and to do so simultaneously.
The Wicksellian emphasis was on making political decisions more efficient, on ensuring that costs be properly weighed against benefits.
A norm of balancing the fiscal decision or choice process, if not a formal balancing of the budget, emerges directly from the Wicksellian analysis.
TO BE CONTINUED ...
Democracy in Deficit: The Political Legacy of Lord Keynes, continued ...
By James M. Buchanan and Richard E. Wagner
Chapter 2 - The Old-Time Fiscal Religion
Classical Fiscal Principle
The history of both fiscal principle and fiscal practice may reasonably be divided into pre- and post-Keynesian periods.
The Keynesian breakpoint is stressed concisely by Hugh Dalton, the textbook writer whose own political career was notoriously brief.
In the post-Keynesian editions of his Principles of Public Finance, Dalton said:
The new approach to budgetary policy owes more to Keynes than to any other man.
Thus it is just that we should speak of “the Keynesian revolution.”
… We may now free ourselves from the old and narrow conception of balancing the budget, no matter over what period, and move towards the new and wider conception of balancing the whole economy. 6
In this chapter, we shall examine briefly the pre-Keynesian history, in terms of both the articulation of fiscal principle and the implementation of fiscal practice.
As noted at the beginning of Chapter 1, the pre-Keynesian or “classical” principles can perhaps best be summarized in the analogy between the state and the family.
Prudent financial conduct by the government was conceived in basically the same image as that by the family or the firm.
Frugality, not profligacy, was accepted as the cardinal virtue, and this norm assumed practical shape in the widely shared principle that public budgets should be in balance, if not in surplus, and that deficits were to be tolerated only in extraordinary circumstances.
Substantial and continuing deficits were interpreted as the mark of fiscal folly.
Principles of sound business practice were also held relevant to the fiscal affairs of government.
When capital expenditures were financed by debt, sinking funds for amortization were to be established and maintained.
The substantial attention paid to the use and operation of sinking funds in the fiscal literature during the whole pre-Keynesian era attests to the strength with which these basic classical principles were held. 7
Textbooks and treatises embodied the noncontroverted principle that public budgets should be in balance.
C. F. Bastable, one of the leading public-finance scholars of the late nineteenth and early twentieth centuries, in commenting on “The Relation of Expenditure and Receipts,” suggested that under normal conditions, there ought to be a balance between these two sides [expenditure and revenue] of financial activity.
Outlay should not exceed income, … tax revenue ought to be kept up to the amount required to defray expenses. 8
Bastable recognized the possibility of extenuating circumstances, which led him to modify his statement of the principle of budget balance by stating:
This general principle must, however, admit of modifications.
Temporary deficits and surpluses cannot be avoided….
All that can be claimed is a substantial approach to a balance in the two sides of the account.
The safest rule for practice is that which lays down the expediency of estimating for a moderate surplus, by which the possibility of a deficit will be reduced to a minimum.9
Classical or pre-Keynesian fiscal principles, in other words, supported a budget surplus during normal times so as to provide a cushion for more troublesome periods.
And similar statements can be found throughout the pre-Keynesian fiscal literature.10
Aside from the simple, and basically intuitive, analogy drawn between governments and individuals and business firms, these rules for “sound finance” were reinforced by two distinct analytical principles, only one of which was made explicit in the economic policy analysis of the period.
The dominant principle (one that was expressed clearly by Adam Smith and incorporated into the theory of economic policy) was that resort to debt finance by government provided evidence of public profligacy, and, furthermore, a form of profligacy that imposed fiscal burdens on subsequent taxpayers.
Put starkly, debt finance enabled people living currently to enrich themselves at the expense of people living in the future.
These notions about debt finance, which were undermined by the Keynesian revolution, reinforced adherence to a balanced-budget principle of fiscal conduct.
We shall describe these principles of debt finance and debt burden more carefully in a subsequent section of this chapter.
A second analytical principle emerged more than a century after Smith’s Wealth of Nations, and it was not explicitly incorporated into the norms for policy.
But it may have been implicitly recognized.
It is important because it reinforces the classical principles from a different and essentially political or public-choice perspective.
In 1896, Knut Wicksell noted that an individual could make an informed, rational assessment of various proposals for public expenditure only if he were confronted with a tax bill at the same time.11
Moreover, to facilitate such comparison, Wicksell suggested that the total costs of any proposed expenditure program should be apportioned among the individual members of the political community.
These were among the institutional features that he thought necessary to make reasonably efficient fiscal decisions in a democracy.
Effective democratic government requires institutional arrangements that force citizens to take account of the costs of government as well as the benefits, and to do so simultaneously.
The Wicksellian emphasis was on making political decisions more efficient, on ensuring that costs be properly weighed against benefits.
A norm of balancing the fiscal decision or choice process, if not a formal balancing of the budget, emerges directly from the Wicksellian analysis.
TO BE CONTINUED ...
Re: THE POLITICAL LEGACY OF LORD KEYNES
The Library of Economics and Liberty
Democracy in Deficit: The Political Legacy of Lord Keynes, continued ...
By James M. Buchanan and Richard E. Wagner
Chapter 2 - The Old-Time Fiscal Religion
Fiscal Practice in Pre-Keynesian Times
Pre-Keynesian fiscal practice was clearly informed by the classical notions of fiscal responsibility, as an examination of the record will show.12
This fiscal history was not one of a rigidly balanced budget defined on an annual accounting basis.
There were considerable year-to-year fluctuations in receipts, in expenditures, and in the resulting surplus or deficit.
Nonetheless, a pattern is clearly discernible: Deficits emerged primarily during periods of war; budgets normally produced surpluses during peacetime, and these surpluses were used to retire the debt created during war emergencies.13
The years immediately following the establishment of the American Republic in 1789 were turbulent.
There was war with the Indians in the Northwest; the Whiskey Rebellion erupted; and relations with England were deteriorating and fears of war were strong.
Federal government budgets were generally in deficit during this period, and by 1795 the gross national debt was $83.8 million.
But by 1811 this total had been reduced nearly by half, to $45.2 million.
And during the sixteen years of this 1795-1811 period, there were fourteen years of surplus and two years of a deficit.
Moreover, the surpluses tended to be relatively large, averaging in the vicinity of $2.5 million in federal budgets with total expenditures that averaged around $8 million.
The War of 1812 brought forth a new sequence of budget deficits that lasted through 1815.
The cumulative deficit over this four-year period slightly exceeded $65 million, which was more than one-half of the cumulative public expenditure during this same period.
Once again, however, the gross national debt of $127 million at the end of 1815 was steadily reduced during the subsequent two decades.
In the twenty-one years from 1816 through 1836, there were eighteen years of surplus, and the gross debt had fallen to $337,000 by the end of 1836.
John W. Kearny, writing in 1887 on the fiscal history of the 1789-1835 period, reflected the sentiment that the retirement of public debt was an important political issue at that time.
The primary vehicle for accomplishing this policy of debt retirement was the Sinking-Fund Act of 1795, as amended in 1802.
Under these acts, substantial revenues were earmarked and set aside for debt retirement.
Kearny’s assessment of the 1795 act expresses clearly the attitude toward deficit finance and public debt that prevailed:
The Act of the 3d of March, 1795, is an event of importance in the financial history of the country.
It was the consummation of what remained unfinished in our system of public credit, in that it publicly recognized, and ingrafted on that system, three essential principles, the regular operation of which can alone prevent a progressive accumulation of debt: first of all it established distinctive revenues for the payment of the interest of the public debt as well as for the reimbursement of the principal within a determinate period; secondly, it directed imperatively their application to the debt alone; and thirdly it pledged the faith of the Government that the appointed revenues should continue to be levied and collected and appropriated to these objects until the whole debt should be redeemed.14
The depression that followed the Panic of 1837 lasted throughout the administration of Martin Van Buren and halfway through the administration of William Henry Harrison and John Tyler, terminating only in 1843.
This depression seems clearly to have been the most severe of the nineteenth century and has been described as “one of the longest periods of sustained contraction in the nation’s history, rivaled only by the downswing of 1929-33.”15
During this seven-year period of economic stress, there were six years of deficit, and the national debt had soared to $32.7 million by the end of 1843.
Once again, as stability returned, the normal pattern of affairs was resumed.
Three consecutive surpluses were run, reducing the national debt to $15.6 million by the end of 1846.
With the advent of the Mexican-American War, deficits emerged again during 1847-1849, and the gross debt climbed to $63.5 million by the end of 1849.
Eight years of surplus then ensued, followed by two years of deficit, and then the Civil War.
By the end of 1865, the gross public debt of the United States government had increased dramatically to $2.7 billion.
Once hostilities ceased, however, twenty-eight consecutive years of budget surplus resulted.
By the end of 1893, the gross debt had been reduced by two-thirds, to $961 million.
The rate of reduction of outstanding debt was substantial, with approximately one-quarter of public expenditure during this period being devoted to debt amortization.
Deficits emerged in 1894 and 1895, and, later in the decade, the Spanish-American War brought forth four additional years of deficit.
By the end of 1899, the gross national debt stood at $1.4 billion.
The years prior to World War I were a mixture of surplus and deficit, with a slight tendency toward surplus serving to reduce the debt to $1.2 billion by the end of 1916.
World War I brought three years of deficit, and the national debt stood at $25.5 billion by the end of 1918.
There then followed eleven consecutive years of surplus, which reduced the national debt to $16.2 billion by 1930.
The Great Depression and World War II then combined to produce sixteen consecutive years of deficit, after which the gross national debt stood at $169.4 billion in 1946.
Until 1946, then, the story of our fiscal practice was largely a consistent one, with budget surpluses being the normal rule, and with deficits emerging primarily during periods of war and severe depression.
The history of fiscal practice coincided with a theory of debt finance that held that resort to debt issue provided a means of reducing present burdens in exchange for the obligation to take on greater burdens in the future.
It was only during some such extraordinary event as a war or a major depression that debt finance seemed to be justified.
While the history of our fiscal practice did not change through 1946, fiscal theory began to change during the 1930s.
One of the elements of this change was the emerging dominance of a theory of the burden of public debt that had been widely discredited.
The classical theory of public debt, which we shall describe more fully in the next section, suggests that debt issue is a means by which present taxpayers can shift part of the cost of government on the shoulders of taxpayers in future periods.
The competing theory of public debt, which had been variously suggested by earlier writers, was embraced anew by Keynesian economists, so much so that it quickly became the orthodox one, and well may be called the “Keynesian” theory of public debt.
This theory explicitly denies that debt finance places any burden on future taxpayers.
It suggests instead that citizens who live during the period when public expenditures are made always and necessarily bear the cost of public services, regardless of whether those services are financed through taxation or through debt creation.
This shift in ideas on public debt was, in turn, vital in securing acquiescence to deficit financing.
There was no longer any reason for opposing deficit financing on basically moral grounds.
This Keynesian theory of debt burden, however, is a topic to be covered in the next chapter; the task at hand is to examine briefly the Smithian or classical theory.
TO BE CONTINUED ...
Democracy in Deficit: The Political Legacy of Lord Keynes, continued ...
By James M. Buchanan and Richard E. Wagner
Chapter 2 - The Old-Time Fiscal Religion
Fiscal Practice in Pre-Keynesian Times
Pre-Keynesian fiscal practice was clearly informed by the classical notions of fiscal responsibility, as an examination of the record will show.12
This fiscal history was not one of a rigidly balanced budget defined on an annual accounting basis.
There were considerable year-to-year fluctuations in receipts, in expenditures, and in the resulting surplus or deficit.
Nonetheless, a pattern is clearly discernible: Deficits emerged primarily during periods of war; budgets normally produced surpluses during peacetime, and these surpluses were used to retire the debt created during war emergencies.13
The years immediately following the establishment of the American Republic in 1789 were turbulent.
There was war with the Indians in the Northwest; the Whiskey Rebellion erupted; and relations with England were deteriorating and fears of war were strong.
Federal government budgets were generally in deficit during this period, and by 1795 the gross national debt was $83.8 million.
But by 1811 this total had been reduced nearly by half, to $45.2 million.
And during the sixteen years of this 1795-1811 period, there were fourteen years of surplus and two years of a deficit.
Moreover, the surpluses tended to be relatively large, averaging in the vicinity of $2.5 million in federal budgets with total expenditures that averaged around $8 million.
The War of 1812 brought forth a new sequence of budget deficits that lasted through 1815.
The cumulative deficit over this four-year period slightly exceeded $65 million, which was more than one-half of the cumulative public expenditure during this same period.
Once again, however, the gross national debt of $127 million at the end of 1815 was steadily reduced during the subsequent two decades.
In the twenty-one years from 1816 through 1836, there were eighteen years of surplus, and the gross debt had fallen to $337,000 by the end of 1836.
John W. Kearny, writing in 1887 on the fiscal history of the 1789-1835 period, reflected the sentiment that the retirement of public debt was an important political issue at that time.
The primary vehicle for accomplishing this policy of debt retirement was the Sinking-Fund Act of 1795, as amended in 1802.
Under these acts, substantial revenues were earmarked and set aside for debt retirement.
Kearny’s assessment of the 1795 act expresses clearly the attitude toward deficit finance and public debt that prevailed:
The Act of the 3d of March, 1795, is an event of importance in the financial history of the country.
It was the consummation of what remained unfinished in our system of public credit, in that it publicly recognized, and ingrafted on that system, three essential principles, the regular operation of which can alone prevent a progressive accumulation of debt: first of all it established distinctive revenues for the payment of the interest of the public debt as well as for the reimbursement of the principal within a determinate period; secondly, it directed imperatively their application to the debt alone; and thirdly it pledged the faith of the Government that the appointed revenues should continue to be levied and collected and appropriated to these objects until the whole debt should be redeemed.14
The depression that followed the Panic of 1837 lasted throughout the administration of Martin Van Buren and halfway through the administration of William Henry Harrison and John Tyler, terminating only in 1843.
This depression seems clearly to have been the most severe of the nineteenth century and has been described as “one of the longest periods of sustained contraction in the nation’s history, rivaled only by the downswing of 1929-33.”15
During this seven-year period of economic stress, there were six years of deficit, and the national debt had soared to $32.7 million by the end of 1843.
Once again, as stability returned, the normal pattern of affairs was resumed.
Three consecutive surpluses were run, reducing the national debt to $15.6 million by the end of 1846.
With the advent of the Mexican-American War, deficits emerged again during 1847-1849, and the gross debt climbed to $63.5 million by the end of 1849.
Eight years of surplus then ensued, followed by two years of deficit, and then the Civil War.
By the end of 1865, the gross public debt of the United States government had increased dramatically to $2.7 billion.
Once hostilities ceased, however, twenty-eight consecutive years of budget surplus resulted.
By the end of 1893, the gross debt had been reduced by two-thirds, to $961 million.
The rate of reduction of outstanding debt was substantial, with approximately one-quarter of public expenditure during this period being devoted to debt amortization.
Deficits emerged in 1894 and 1895, and, later in the decade, the Spanish-American War brought forth four additional years of deficit.
By the end of 1899, the gross national debt stood at $1.4 billion.
The years prior to World War I were a mixture of surplus and deficit, with a slight tendency toward surplus serving to reduce the debt to $1.2 billion by the end of 1916.
World War I brought three years of deficit, and the national debt stood at $25.5 billion by the end of 1918.
There then followed eleven consecutive years of surplus, which reduced the national debt to $16.2 billion by 1930.
The Great Depression and World War II then combined to produce sixteen consecutive years of deficit, after which the gross national debt stood at $169.4 billion in 1946.
Until 1946, then, the story of our fiscal practice was largely a consistent one, with budget surpluses being the normal rule, and with deficits emerging primarily during periods of war and severe depression.
The history of fiscal practice coincided with a theory of debt finance that held that resort to debt issue provided a means of reducing present burdens in exchange for the obligation to take on greater burdens in the future.
It was only during some such extraordinary event as a war or a major depression that debt finance seemed to be justified.
While the history of our fiscal practice did not change through 1946, fiscal theory began to change during the 1930s.
One of the elements of this change was the emerging dominance of a theory of the burden of public debt that had been widely discredited.
The classical theory of public debt, which we shall describe more fully in the next section, suggests that debt issue is a means by which present taxpayers can shift part of the cost of government on the shoulders of taxpayers in future periods.
The competing theory of public debt, which had been variously suggested by earlier writers, was embraced anew by Keynesian economists, so much so that it quickly became the orthodox one, and well may be called the “Keynesian” theory of public debt.
This theory explicitly denies that debt finance places any burden on future taxpayers.
It suggests instead that citizens who live during the period when public expenditures are made always and necessarily bear the cost of public services, regardless of whether those services are financed through taxation or through debt creation.
This shift in ideas on public debt was, in turn, vital in securing acquiescence to deficit financing.
There was no longer any reason for opposing deficit financing on basically moral grounds.
This Keynesian theory of debt burden, however, is a topic to be covered in the next chapter; the task at hand is to examine briefly the Smithian or classical theory.
TO BE CONTINUED ...
Re: THE POLITICAL LEGACY OF LORD KEYNES
The Library of Economics and Liberty
Democracy in Deficit: The Political Legacy of Lord Keynes, continued ...
By James M. Buchanan and Richard E. Wagner
Chapter 2 - The Old-Time Fiscal Religion
Balanced Budgets, Debt Burdens, and Fiscal Responsibility
Pre-Keynesian debt theory held that there is one fundamental difference between tax finance and debt finance that is obscured by the Keynesians.
In the pre-Keynesian view, a choice between tax finance and debt finance is a choice of the timing of the payments for public expenditure.
Tax finance places the burden of payment squarely upon those members of the political community during the period when the expenditure decision is made.
Debt finance, on the other hand, postpones payment until interest and amortization payments on debt come due.
Debt finance enables those people living at the time of fiscal decision to shift payment onto those living in later periods, which may, of course, be the same group, especially if the period over which the debt is amortized is short.
In earlier works, we have offered an analytical defense of the classical theory of public debt, and especially as it is compared with its putative Keynesian replacement.
16
We shall not, at this point, repeat details of other works.
Nonetheless, a summary analysis of the basic classical theory will be helpful, since the broad acceptance of this theory by the public and by the politicians was surely a significant element in cementing and reinforcing the private-public finance analogy.
What happens when a government borrows?
Before this question may be answered, we must specify both the fiscal setting that is assumed to be present and the alternative courses of action that might be followed.
The purpose of borrowing is, presumably, to finance public spending.
It seems, therefore, appropriate to assume that a provisional decision has been made to spend public funds.
Having made this decision, the question reduces to one of choice among alternative means of financing.
There are only three possibilities: (1) taxation, (2) public borrowing or debt issue, and (3) money creation.
We shall, at this point, leave money creation out of account, because the Keynesian attack was launched on the classical theory of public borrowing, not upon the traditionally accepted theory of the effects of money creation.
The theory of public debt reduces to a comparison between the effects of taxation and public debt issue, on the assumption that the public spending is fixed.
The question becomes: When a government borrows, what happens that does not happen when it finances the same outlay through current taxation?
With borrowing, the command over real resources, over purchasing power, is surrendered voluntarily to government by those who purchase the bonds sold by the government, in a private set of choices independent of the political process.
This is simply an ordinary exchange.
Those who purchase these claims are not purchasing or paying for the benefits that are promised by the government outlays.
They are simply paying for the obligations on the part of the government to provide them with an interest return in future periods and to amortize the principal on some determinate schedule.
(This extremely simple point, the heart of the whole classical theory of public debt, is the source of major intellectual confusion.)
These bond purchasers are the only persons in the community who give up or sacrifice commands over current resource use, who give up private investment or consumption prospects, in order that the government may obtain command over the resources which the budgetary outlays indicate to be desirable.
But if this sacrifice of purchasing power is made through a set of voluntary exchanges for bonds, who is really “purchasing,” and by implication “paying for,” the benefits that the budgetary outlays promise to provide?
The ultimate “purchasers” of such benefits, under the public debt as under the taxation alternative, are all the members of the political community, at least as these are represented through the standard political decision-making process.
A decision to “purchase” these benefits is presumably made via the political rules and institutions in being.
But who “pays for” these benefits?
Who suffers private costs which may then be balanced off against the private benefits offered by the publicly supplied services?
Under taxation, these costs are imposed directly on the citizens, as determined by the existing rules for tax or cost sharing.
Under public borrowing, by contrast, these costs are not imposed currently, during the budgetary period when the outlays are made.
Instead, these costs are postponed or put off until later periods when interest and amortization payments come due.
This elementary proposition applies to public borrowing in precisely the same way that it applies to private borrowing; the classical analogy between private and public finance seems to hold without qualification.
Indeed, the whole purpose of borrowing, private or public, should be to facilitate an expansion of outlay by putting off the necessity for meeting the costs.
The basic institution of debt is designed to modify the time sequence between outlay and payment.
As such, and again for both the private and the public borrower, there is no general normative rule against borrowing as opposed to current financing, and especially with respect to capital outlays.
There is nothing in the classical theory of public debt that allows us to condemn government borrowing at all times and places.
Both for the family or firm and for the government, there exist norms for financial responsibility, for prudent fiscal conduct.
Resort to borrowing, to debt issue, should be limited to those situations in which spending needs are “bunched” in time, owing either to such extraordinary circumstances as natural emergencies or disasters or to the lumpy requirements of a capital investment program.
In either case, borrowing should be accompanied by a scheduled program of amortization.
When debt is incurred because of the investment of funds in capital creation, amortization should be scheduled to coincide with the useful or productive life of the capital assets.
Guided by this principle of fiscal responsibility, a government may, for example, incur public debts to construct a road or highway network, provided that these debts are scheduled for amortization over the years during which the network is anticipated to yield benefits or returns to the citizens of the political community.
Such considerations as these provide the source for separating current and capital budgets in the accounts of governments, with the implication that principles of financing may differ as the type of outlay differs.
These norms incorporate the notion that only the prospect of benefits in periods subsequent to the outlay makes legitimate the postponing or putting off of the costs of this outlay.
There is nothing in this classically familiar argument, however, that suggests that the costs will somehow disappear because the benefits accrue in later periods, an absurd distortion that some of the more extreme Keynesian arguments would seem to introduce.
The classical rules for responsible borrowing, public or private, are clear enough, but the public-finance-private-finance analogy may break down when the effects of irresponsible or imprudent financial conduct are analyzed.
The dangers of irresponsible borrowing seem greater for governments than for private families or firms.
For this reason, more stringent constraints may need to be placed on public than on private debt issue.
The difference lies in the specification and identification of the liability or obligation incurred under debt financing in the two cases.
If an individual borrows, he incurs a personal liability.
The creditor holds a claim against the assets of the person who initially makes the decision to borrow, and the borrower cannot readily shift his liability to others.
There are few willing recipients of liabilities.
If the borrower dies, the creditor has a claim against his estate.
Compare this with the situation of an individual who is a citizen in a political community whose governmental units borrow to finance current outlay.
At the time of the borrowing decision, the individual citizen is not assigned a specific and determinate share of the fiscal liability that the public debt represents.
He may, of course, sense that some such liability exists for the whole community, but there is no identifiable claim created against his privately owned assets.
The obligations are those of the political community, generally considered, rather than those of identified members of the community.
If, then, a person can succeed in escaping what might be considered his “fair” share of the liability by some change in the tax-share structure, or by some shift in the membership of the community through migration, or merely by growth in the domestic population, he will not behave as if the public debt is equivalent to private debt.
Because of this difference in the specification and identification of liability in private and public debt, we should predict that persons will be somewhat less prudent in issuing the latter than the former.
That is to say, the pressures brought to bear on governmental decision makers to constrain irresponsible borrowing may not be comparable to those that the analogous private borrower would incorporate within his own behavioral calculus.
The relative absence of such public or voter constraints might lead elected politicians, those who explicitly make spending, taxing, and borrowing decisions for governments, to borrow even when the conditions for responsible debt issues are not present.
It is in recognition of such proclivities that classical principles of public fiscal responsibility incorporate explicit limits on resort to borrowing as a financing alternative, and which also dictate that sinking funds or other comparable provisions be made for amortization of loans at the time of any initial spending-borrowing commitment. 17
Without some such constraints, the classical theory embodies the prediction of a political scenario with cumulatively increasing public debt, unaccompanied by comparable values in accumulating public assets, a debt which, quite literally, places a mortgage claim against the future income of the productive members of the political community.
As new generations of voters-taxpayers appear, they would, under this scenario, face fiscal burdens that owe their origins exclusively to the profligacy of their forebears.
To the extent that citizens, and the politicians who act for them in making fiscal choices, regard members of future generations as lineal extensions of their own lives, the implicit fears of overextended public credit might never be realized.
But for the reasons noted above, classical precepts suggest that dependence could not be placed on such potential concern for taxpayers in future periods.
The effective time horizon, both for members of the voting public and for the elected politicians alike, seems likely to be short, an implicit presumption of the whole classical construction.
This is not, of course, to deny that the effects on taxpayers in later budgetary periods do not serve, and cannot serve, as constraints on public borrowing.
So long as decision makers act on the knowledge that debt issue does, in fact, shift the cost of outlay forward in time, some limit is placed on irresponsible behavior.
That is to say, even in the absence of classically inspired institutional constraints on public debt, a generalized public acceptance of the classical theory of public debt would, in itself, exert an important inhibiting effect.
It is in this context that the putative replacement of the classical theory by the Keynesian theory can best be evaluated.
The latter denies that debt finance implements an intertemporal shift of realized burden or cost of outlay, quite apart from the question as to the possible desirability or undesirability of this method of financing.
The existence of opportunities for cumulative political profligacy is viewed as impossible; there are no necessarily adverse consequences for future taxpayers.
The selling of the Keynesian theory of debt burden, which we shall examine in the next chapter, was a necessary first step in bringing about a democracy in deficit.
TO BE CONTINUED ...
Democracy in Deficit: The Political Legacy of Lord Keynes, continued ...
By James M. Buchanan and Richard E. Wagner
Chapter 2 - The Old-Time Fiscal Religion
Balanced Budgets, Debt Burdens, and Fiscal Responsibility
Pre-Keynesian debt theory held that there is one fundamental difference between tax finance and debt finance that is obscured by the Keynesians.
In the pre-Keynesian view, a choice between tax finance and debt finance is a choice of the timing of the payments for public expenditure.
Tax finance places the burden of payment squarely upon those members of the political community during the period when the expenditure decision is made.
Debt finance, on the other hand, postpones payment until interest and amortization payments on debt come due.
Debt finance enables those people living at the time of fiscal decision to shift payment onto those living in later periods, which may, of course, be the same group, especially if the period over which the debt is amortized is short.
In earlier works, we have offered an analytical defense of the classical theory of public debt, and especially as it is compared with its putative Keynesian replacement.
16
We shall not, at this point, repeat details of other works.
Nonetheless, a summary analysis of the basic classical theory will be helpful, since the broad acceptance of this theory by the public and by the politicians was surely a significant element in cementing and reinforcing the private-public finance analogy.
What happens when a government borrows?
Before this question may be answered, we must specify both the fiscal setting that is assumed to be present and the alternative courses of action that might be followed.
The purpose of borrowing is, presumably, to finance public spending.
It seems, therefore, appropriate to assume that a provisional decision has been made to spend public funds.
Having made this decision, the question reduces to one of choice among alternative means of financing.
There are only three possibilities: (1) taxation, (2) public borrowing or debt issue, and (3) money creation.
We shall, at this point, leave money creation out of account, because the Keynesian attack was launched on the classical theory of public borrowing, not upon the traditionally accepted theory of the effects of money creation.
The theory of public debt reduces to a comparison between the effects of taxation and public debt issue, on the assumption that the public spending is fixed.
The question becomes: When a government borrows, what happens that does not happen when it finances the same outlay through current taxation?
With borrowing, the command over real resources, over purchasing power, is surrendered voluntarily to government by those who purchase the bonds sold by the government, in a private set of choices independent of the political process.
This is simply an ordinary exchange.
Those who purchase these claims are not purchasing or paying for the benefits that are promised by the government outlays.
They are simply paying for the obligations on the part of the government to provide them with an interest return in future periods and to amortize the principal on some determinate schedule.
(This extremely simple point, the heart of the whole classical theory of public debt, is the source of major intellectual confusion.)
These bond purchasers are the only persons in the community who give up or sacrifice commands over current resource use, who give up private investment or consumption prospects, in order that the government may obtain command over the resources which the budgetary outlays indicate to be desirable.
But if this sacrifice of purchasing power is made through a set of voluntary exchanges for bonds, who is really “purchasing,” and by implication “paying for,” the benefits that the budgetary outlays promise to provide?
The ultimate “purchasers” of such benefits, under the public debt as under the taxation alternative, are all the members of the political community, at least as these are represented through the standard political decision-making process.
A decision to “purchase” these benefits is presumably made via the political rules and institutions in being.
But who “pays for” these benefits?
Who suffers private costs which may then be balanced off against the private benefits offered by the publicly supplied services?
Under taxation, these costs are imposed directly on the citizens, as determined by the existing rules for tax or cost sharing.
Under public borrowing, by contrast, these costs are not imposed currently, during the budgetary period when the outlays are made.
Instead, these costs are postponed or put off until later periods when interest and amortization payments come due.
This elementary proposition applies to public borrowing in precisely the same way that it applies to private borrowing; the classical analogy between private and public finance seems to hold without qualification.
Indeed, the whole purpose of borrowing, private or public, should be to facilitate an expansion of outlay by putting off the necessity for meeting the costs.
The basic institution of debt is designed to modify the time sequence between outlay and payment.
As such, and again for both the private and the public borrower, there is no general normative rule against borrowing as opposed to current financing, and especially with respect to capital outlays.
There is nothing in the classical theory of public debt that allows us to condemn government borrowing at all times and places.
Both for the family or firm and for the government, there exist norms for financial responsibility, for prudent fiscal conduct.
Resort to borrowing, to debt issue, should be limited to those situations in which spending needs are “bunched” in time, owing either to such extraordinary circumstances as natural emergencies or disasters or to the lumpy requirements of a capital investment program.
In either case, borrowing should be accompanied by a scheduled program of amortization.
When debt is incurred because of the investment of funds in capital creation, amortization should be scheduled to coincide with the useful or productive life of the capital assets.
Guided by this principle of fiscal responsibility, a government may, for example, incur public debts to construct a road or highway network, provided that these debts are scheduled for amortization over the years during which the network is anticipated to yield benefits or returns to the citizens of the political community.
Such considerations as these provide the source for separating current and capital budgets in the accounts of governments, with the implication that principles of financing may differ as the type of outlay differs.
These norms incorporate the notion that only the prospect of benefits in periods subsequent to the outlay makes legitimate the postponing or putting off of the costs of this outlay.
There is nothing in this classically familiar argument, however, that suggests that the costs will somehow disappear because the benefits accrue in later periods, an absurd distortion that some of the more extreme Keynesian arguments would seem to introduce.
The classical rules for responsible borrowing, public or private, are clear enough, but the public-finance-private-finance analogy may break down when the effects of irresponsible or imprudent financial conduct are analyzed.
The dangers of irresponsible borrowing seem greater for governments than for private families or firms.
For this reason, more stringent constraints may need to be placed on public than on private debt issue.
The difference lies in the specification and identification of the liability or obligation incurred under debt financing in the two cases.
If an individual borrows, he incurs a personal liability.
The creditor holds a claim against the assets of the person who initially makes the decision to borrow, and the borrower cannot readily shift his liability to others.
There are few willing recipients of liabilities.
If the borrower dies, the creditor has a claim against his estate.
Compare this with the situation of an individual who is a citizen in a political community whose governmental units borrow to finance current outlay.
At the time of the borrowing decision, the individual citizen is not assigned a specific and determinate share of the fiscal liability that the public debt represents.
He may, of course, sense that some such liability exists for the whole community, but there is no identifiable claim created against his privately owned assets.
The obligations are those of the political community, generally considered, rather than those of identified members of the community.
If, then, a person can succeed in escaping what might be considered his “fair” share of the liability by some change in the tax-share structure, or by some shift in the membership of the community through migration, or merely by growth in the domestic population, he will not behave as if the public debt is equivalent to private debt.
Because of this difference in the specification and identification of liability in private and public debt, we should predict that persons will be somewhat less prudent in issuing the latter than the former.
That is to say, the pressures brought to bear on governmental decision makers to constrain irresponsible borrowing may not be comparable to those that the analogous private borrower would incorporate within his own behavioral calculus.
The relative absence of such public or voter constraints might lead elected politicians, those who explicitly make spending, taxing, and borrowing decisions for governments, to borrow even when the conditions for responsible debt issues are not present.
It is in recognition of such proclivities that classical principles of public fiscal responsibility incorporate explicit limits on resort to borrowing as a financing alternative, and which also dictate that sinking funds or other comparable provisions be made for amortization of loans at the time of any initial spending-borrowing commitment. 17
Without some such constraints, the classical theory embodies the prediction of a political scenario with cumulatively increasing public debt, unaccompanied by comparable values in accumulating public assets, a debt which, quite literally, places a mortgage claim against the future income of the productive members of the political community.
As new generations of voters-taxpayers appear, they would, under this scenario, face fiscal burdens that owe their origins exclusively to the profligacy of their forebears.
To the extent that citizens, and the politicians who act for them in making fiscal choices, regard members of future generations as lineal extensions of their own lives, the implicit fears of overextended public credit might never be realized.
But for the reasons noted above, classical precepts suggest that dependence could not be placed on such potential concern for taxpayers in future periods.
The effective time horizon, both for members of the voting public and for the elected politicians alike, seems likely to be short, an implicit presumption of the whole classical construction.
This is not, of course, to deny that the effects on taxpayers in later budgetary periods do not serve, and cannot serve, as constraints on public borrowing.
So long as decision makers act on the knowledge that debt issue does, in fact, shift the cost of outlay forward in time, some limit is placed on irresponsible behavior.
That is to say, even in the absence of classically inspired institutional constraints on public debt, a generalized public acceptance of the classical theory of public debt would, in itself, exert an important inhibiting effect.
It is in this context that the putative replacement of the classical theory by the Keynesian theory can best be evaluated.
The latter denies that debt finance implements an intertemporal shift of realized burden or cost of outlay, quite apart from the question as to the possible desirability or undesirability of this method of financing.
The existence of opportunities for cumulative political profligacy is viewed as impossible; there are no necessarily adverse consequences for future taxpayers.
The selling of the Keynesian theory of debt burden, which we shall examine in the next chapter, was a necessary first step in bringing about a democracy in deficit.
TO BE CONTINUED ...