Public Principles of Public Debt

by Don Boudreaux on September 2, 2011

in Budget Issues, Debt and Deficits, Economics, Myths and Fallacies, Seen and Unseen, State of Macro

Here’s a letter to the editor of The University of Virginia Magazine:

I genuinely enjoy your publication, and am delighted to find in the Fall 2011 issue Ed Crews’s and Lee Graves’s admirable account of the debt troubles caused by Uncle Sam’s fiscal recklessness (“Our National ‘Time Bomb’“).

Were the Crews and Graves essay published by any institution other than U.VA, I’d not be moved to remark on it.  But given that it appears in the U.VA Magazine, I’m obliged to pick a nit.

Crews and Graves report that “Last fall [Peter G.] Peterson was awarded a Thomas Jefferson Foundation medal, the University’s highest external honor, for his role in addressing the nation’s fiscal situation. Harry Harding, dean of U.Va.’s Frank Batten School of Leadership and Public Policy, describes him as a personal hero ‘because he was so far ahead of his time in focusing on this issue of import today.’”

Mr. Peterson has indeed long highlighted the problem of America’s growing public debt, but well before he entered the scene, a U.VA economist (unmentioned by Crews and Graves) almost single-handedly revolutionized our thinking about deficit financing.

Prof. James M. Buchanan – who served on U.VA’s faculty from 1956 to 1968 – wrote in 1958 a book entitled Public Principles of Public Debt.  Before its publication, the near-unanimous opinion of scholars, pundits, and policymakers was that even very large government debt imposes only very small burdens – and burdens only of a secondary order.  Deficit financing of government spending, therefore, wasn’t much of a problem.

In less than 200 pages Buchanan vividly exposed the flawed assumptions and sloppy reasoning that produced this consensus, thus blowing it to smithereens.

While some people still cling to the “pre-Buchanan” notion of government debt being harmless, it was Jim Buchanan’s little book of 53 years ago, written in Charlottesville, that built the intellectual ground upon which today stand Mr. Peterson and other deficit hawks.

Donald J. Boudreaux (Law ’92)

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Jameson September 3, 2011 at 12:13 am

Didn’t realize we had such a legacy here at UVA! Too bad I’m studying math instead of economics.

Dan J September 4, 2011 at 1:12 am

You said math and economics in the same sentence…. Be prepared for a shilacking from a local resident.

DG Lesvic September 3, 2011 at 12:30 am

I’m glad to learn that about Buchanan, and that he had a real contribution to make to economics, and, by any other name, still just economics.

vidyohs September 3, 2011 at 6:06 am

I guess I am just to old school country boy to understand how anyone at any time can think that carrying debt in an obvious random changing natural world is a good thing. Compound natural instability with 6 billion plus invisible hands, that concern themselves invisibly with more than just markets (things like power and rule), and in my mind it becomes insane to have debt.

Yes, I have acted insanely once or twice in my life and created personal debt, but in my mind that debt hounded me until I paid it off and could be putting money into savings again.

Would that everyone felt so about debt, public or private.

vidyohs September 3, 2011 at 6:07 am

Rothchilds dictum about controlling the money means you don’t have to worry about who writes the rules, applies to any debt. Allow someone to control your money and they control you.

Per Kurowski September 3, 2011 at 11:06 am

But what is for me impossible to understand is how the debate completely ignores the fact that bank regulations require the banks to hold much more capital when lending to “risky” citizens (around 8 percent) and basically no capital at all when lending to the “safe” government. That sort of stealth communism has provided the strongest growth-hormone for uncontrollable public debt.

You do not even know what the real market interest rates would be without such pro-government regulatory bias and so in most respects you are flying blind

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