Economics Dictionary of ArgumentsHome
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| Government debt: Government debt, also known as public debt, refers to the accumulated financial obligations a government owes to creditors, individuals, or institutions. It arises from borrowing to finance expenditures exceeding revenues. Represented by bonds or securities, it reflects the total amount the government owes and is a key indicator of a country's financial health and borrowing capacity. See also Government budget, State, Fiscal policy._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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James M. Buchanan on Government Debt - Dictionary of Arguments
Boudreaux I 13 Government debt/Buchanan/Boudreaux/Holcombe: „The essence of public debt, as a financing institution, is that it allows the objective cost of currently financed expenditure projects to be postponed in time. For the taxpayer, public debt delays the necessity of transferring command over resource services to the treasury.“ James M. Buchanan, “Confessions of a Burden Monger” (1964)(1). Boudreaux I 14 [It was a] consensus by mid-twentieth century economists that debt-financed projects are paid for by citizen-taxpayers at the time the projects are undertaken rather than by future generations. „New orthodoxy“/Buchanan: Buchanan called [this]“the new orthodoxy.” It was an orthodoxy because it was widely taken to be obviously true, and it was new because it sprung from Keynesian economics, which in 1958 was only 22 years old. Tradition: Until John Maynard Keynes published his General Theory of Employment, Interest, and Money in 1936(2), most economists - from Adam Smith in the mid-eighteenth century through economists in the early twentieth century - understood that the costs of government projects funded with debt are passed on to the future generations who, as citizen-taxpayers, must repay the debt. KeynesianismVsSmith, Adam: This understanding was rejected by the new orthodoxy ((s) Keynesianism) and replaced with the insistence that projects funded with borrowed money are, just like projects funded with currently collected taxes, paid for at the time the projects are undertaken. The new orthodoxy does recognize that debt financing nevertheless leaves a legacy for future citizen-taxpayers. In the case of [a] hypothetical hydroelectric dam built in 2021 with borrowed funds, citizens are obliged in 2051 to repay the debt that was incurred 30 years earlier. To do so they must, in 2051, pay more in taxes or suffer cuts in government programs (or some combination of the two) (…). Boudreaux I 15 But, the new orthodoxy continues, if the bond is owned and submitted for redemption by nationals, then apart from some relatively negligible costs incurred in carrying out the process of transferring the funds from citizen-taxpayers to citizen-bondholders, redemption imposes no net burden on nationals. Although those citizens who pay the debt are worse off as a result of paying more in taxes or receiving less in government services, other citizens - those who receive repayment of the debt - are better off by the same amount. Just as a household is made neither richer nor poorer if a wife transfers money to her husband, a nation is made neither richer nor poorer if one group of citizens transfers money to another group of citizens. Using the phrase that mid-1950s economists employed to describe this situation, nationals in 2051 might say, “We owe it to ourselves.” BuchananVsNew orthodoxy/BuchananVsKeynesianism: According to Buchanan, the new orthodoxy’s fatal flaw is its insistence that the costs of debt financing are incurred in the periods when the debt-financed programs are undertaken. Boudreaux I 16 And if this insistence is wrong, then the older, pre-Keynesian understanding is correct that programs funded with debt today are paid for by citizen-taxpayers tomorrow. Therefore, by using debt to finance government programs, we, today’s citizen-taxpayers, can indeed consume at the expense of our children and grandchildren. >Public finance, >Interest rates, cf. >Time/Rothbard. Solution/Buchanan: The key insight in Buchanan’s criticism of the new orthodoxy and, hence, of his revitalization of the older, classical view is the realization that creditors who lend money to the government do so voluntarily. But these creditors lend to the government only because they believe that the interest payments they will receive in exchange make such loans worthwhile for them. These creditors are not the purchasers of the debt-financed projects; instead, they are purchasers of future interest payments that make it worthwhile for them to sacrifice their consumption today. Thus, debt-financed government projects are not paid for by the government’s creditors. After all, the very reason the government in 2021 borrows the funds to build the dam is to relieve today’s citizen-taxpayers from having to pay for it. Yet someone has to pay for the dam! Who? Buchanan’s answer is that the dam is paid for by citizen-taxpayers in 2051, who are obliged to repay the debt. >Taxation. KeynesianismVsBuchanan: Adherents of the new orthodoxy respond by saying that if the debt is repaid to fellow citizens, there is no net reduction in aggregate national wealth. The repayment, they maintain, is merely a transfer, as if from the left hand to the right. BuchananVsVs: Buchanan, however, argued that this reasoning is mistaken. If the creditors in 2021 had not loaned [the money] to the government, they would have done something else with their money - something else of nearly equivalent value to lending to the government - such as, for instance, lending [the money] to private companies. >Time preference, >Opportunity costs. Credit/repayment: Buchanan assumed, not unrealistically, that credit markets are competitive. From this assumption it follows that the attractiveness to creditors of lending to the government is only marginally greater than (that is, is largely equivalent to) the attractiveness of using their money in other ways. And so when in 2051 the government’s creditors are repaid, they are made no better off (or worse off) than they would have been had they used their money differently in 2021. Repayment of the debt does not make the repaid creditors anything but marginally richer than they would have been had they instead invested their money in alternative projects. But repayment does make the citizen-taxpayers who foot the bill poorer by the full amount of the repayment. >Credit. Boudreaux I 19 Note that Buchanan’s argument that each debt-financed project is paid for by the future citizen-taxpayers who must service the debt holds regardless of whether the project is wasteful or productive. Debt/taxation/Buchanan: Buchanan’s argument should not, therefore, be interpreted as counselling against any and all debt financing. He explicitly recognized that it is appropriate to finance some projects with debt rather than with current taxation. Projects that yield benefits to future citizen-taxpayers are appropriately paid for by those future taxpayers rather than by current taxpayers who derive no benefits from such projects. In such cases, debt financing is a vehicle for handing the bill to those who will receive the benefits. Free rider/Buchanan: This ability of current taxpayers to use debt financing to free-ride on the wealth of future generations led Buchanan to worry that government today will both spend excessively and fund too many projects with debt. >Moral hazard. Boudreaux I 20 Democracy/Buchanan: Tomorrow’s citizen-taxpayers, after all, are not today’s voters. Thus, the interests of these future generations are under-represented in the political process. To reduce the magnitude of this problem, Buchanan endorsed constitutional rules that oblige governments to annually keep their budgets in balance. Constitution/Buchanan: His fear that the opportunity for debt financing of government projects and programs would be abused was so acute that it led him to endorse a balanced-budget amendment to the US Constitution. His participation in a political effort to secure such an amendment is one of the very few specific, ground-level policy battles that he actively joined. >Constitution/Buchanan. Boudreaux I 21 Government Debt: When analyzing the activities of government, the costs and benefits of government policies fall on individuals, not on aggregates or groups. The argument that domestically held public debt is no burden because “we owe it to ourselves” is revealed as fallacious once we recognize that the aggregate – ourselves - is really composed of many individuals, some of whom will pay the taxes to finance the debt repayment, and some of whom will receive the proceeds when they redeem the bonds they hold. 1. Buchanan, James M. (1964). “Confessions of a Burden Monger”. Journal of Political Economy Vol. 72, No. 5 (Oct., 1964), pp. 486-488. 2. Keynes, J. M. [1936] The General Theory of Employment, Interest and Money. London: Macmillan. - - - Mause I 279 Government Debt/Buchanan: Question: Is it basically acceptable for citizens to give their representatives the opportunity to deficit finance their budgets? (Prerequisite: the Ricardian Equivalence Theorem does not apply; see Terminology/Economic Theories). Brennan/Buchanan: No: Deficit financing would be systematically used to finance expenditures beyond the desired level and past the tax resistance of citizens.(1) >Generational Justice/Diamond, Equivalence Theorem/Barro. See also BuchananVsBarro. 1. Geoffrey Brennan & James M. Buchanan, The power to tax. Analytical foundations of a fiscal constitution. Cambridge 1980._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
EconBuchan I James M. Buchanan Politics as Public Choice Carmel, IN 2000 Boudreaux I Donald J. Boudreaux Randall G. Holcombe The Essential James Buchanan Vancouver: The Fraser Institute 2021 Boudreaux II Donald J. Boudreaux The Essential Hayek Vancouver: Fraser Institute 2014 Mause I Karsten Mause Christian Müller Klaus Schubert, Politik und Wirtschaft: Ein integratives Kompendium Wiesbaden 2018 |
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> Counter arguments against Buchanan
> Counter arguments in relation to Government Debt
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