I confess to my possessing inadequate talent for expressing the simple truth that is at the core of of Jim Buchanan’s 1958 classic tract, Public Principles of Public Debt.* So because one should not devote much time to doing what one does only poorly, I will do my best to make this post and one immediately to follow the last – at least for a while – on the topic of public debt and its burden.
Here’s a list of some questions that are not at the core of issue:
(1) whether or not the projects funded by government debt are worthwhile;
(2) whether or not the economy is at full employment;
(3) whether or not future generations, because wealthier, are better able to bear the burden of paying off the debt;
(4) whether or not government debt coming due tomorrow can be refinanced until the day-after tomorrow.
Instead, the question addressed by Buchanan in his work on debt was the very simple one: who bears the burden of repaying government debt?
That is, if government builds a bridge today by borrowing money, who ultimately pays for the bridge? Buchanan showed, I believe conclusively, that the bridge is paid for by the people whose taxes rise in order to pay off the bondholders (that is, in order to pay off the creditors who lent the money in the first place, or the successors of these creditors). Debt issued today, therefore, is a burden on future taxpayers.
Yes, it’s true that current taxpayers can realize that this burden will fall upon their heirs. And it’s true that to relieve their beloved children and grandchildren and great-grandchildren from tomorrow’s higher tax burden today’s citizens can reduce their own current spending and put the proceeds of this reduced spending into an account from which their heirs can draw in order to pay tomorrow’s higher taxes. If this tax-anticipation and heir-salvaging happens perfectly, then and only then is the burden of paying for the bridge borne by today’s citizens.
Buchanan argued that such tax-anticipation and heir-salvaging is practically unlikely. After all, if such actions by today’s citizens are likely, why not fund the bridge by raising taxes today? (As a practical matter, ask how likely it is that Grandmama and Grandpappy are increasing their savings today in order to ensure that their grandchildren can better pay off the debt that Uncle Sam runs up today so that he can send Social Security checks to Grandmama and Grandpappy.)
Regardless of your position on the above two paragraphs, you must concede that it is at least possible that today’s citizens will be tempted to consume today at the expense of unknown future taxpayers. (Keynesians, of course, will – and quite properly – readily agree, or at least hope, that an additional dollar of debt-financed government spending today is not off-set by an additional dollar of saving today.)
From here on in, therefore, let’s assume that today’s voters are willing to increase their consumption at least partly at the expense of future taxpayers. I share Buchanan’s belief that this assumption is realistic. Spending other people’s money is so much more fun than spending your own, especially if those other people are faceless and, in many cases, not yet even born.
So government builds a bridge with borrowed funds. The bridge is not free. Someone must pay for it. Buchanan showed, as I explained in this earlier post, that taxpayers tomorrow pay for the bridge – that is, bear the “burden” of the bridge.
Buchanan also argued that it is an error to suppose that, if the bondholder who must be repaid tomorrow is a citizen of the same country as is the taxpayer whose taxes rise to repay the bondholder, then the burden borne by the taxpayer is somehow canceled out. Scholars less careful than Buchanan – especially the Keynesians of the 1950s (and again today) – are misled into thinking that outstanding debt owed by government to its own citizens does not represent a genuine burden to its citizens as a group. (“We owe it to ourselves!” In the aggregate, then, there’s no net burden!”)
Buchanan’s argument is crucially important. The reason is that the belief that $X of outstanding yet internally held government debt is no net burden on the citizens of the country threatens to make people too sanguine about debt-financed government spending. (“Don’t worry so much about the outstanding debt. We owe it mostly to ourselves. It’s not like government is a private household or firm!”) But Buchanan insisted – again, I believe unassailably – that government is not a miraculously different institution that somehow is exempted from basic laws of arithmetic, finance, and economics. Debt that government incurs is costly no less so than is debt incurred by any household or firm.
* It’s frustrating that so many people write today about this issue of the burden of government debt – and criticize Buchanan’s position on it as being old-fashioned or silly or both – without, apparently, ever having read this very short and accessible book by him (or any of his many essays and books on the matter, such as his 1977 classic work with Dick Wagner, Democracy in Deficit).