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… is from page 454 of James Buchanan [2]’s wonderfully direct, clear, and concise 1986 Economia delle scelte pubbliche paper, “The Economic Consequences of the Deficit,” as this paper is reprinted in Debt and Taxes [3] (2000), which is volume 14 of the The Collected Works of James M. Buchanan [4]:
Both our fiscal and our monetary structures are currently in disarray. And, as members of the body politic, we are behaving irresponsibly in our unwillingness to look at, analyze, and ultimately to support structural reforms that offer the only prospects for permanent improvement. We have allowed a quasi-independent monetary authority to accidentally attain a monopoly over fiat money issue without effective political control…. Alongside this random-walk monetary authority, we have a fiscal structure from which almost all pretense of balancing off the costs of taxes against the benefits of spending have been removed. The problem is not, however, with irresponsible political leaders, in either the executive or legislative branch of government. The problem is that the rules of the game are such as to make fiscal responsibility and fiscal prudence beyond the limits of the politically feasible. Constituents enjoy the benefits of public spending; they do not enjoy paying taxes. The politics of the [government budget] deficit is a simple as that.
DBx: So true.
Buchanan might be faulted, somewhat, for suggesting that political ‘leaders’ aren’t to be blamed for their fiscal irresponsibility – irresponsibility so grotesque that it can accurately be called fiscal lechery. (If we as citizens are, as Buchanan says with good reason, irresponsible in not taking the longer-run stance required to change the rules in ways that would cure elected-‘leaders’’ fiscal incontinence, it seems to me that elected ‘leaders’ also bear some blame for behaving irresponsibly.)
Yet Buchanan’s deeper point stands and is vitally important: because the actions of politicians, and of all others acting politically, are governed overwhelmingly by the rules of the political process, formal and informal, the outcomes of the political process will not improve absent any genuine change in these rules.
Further, because operative rules of the political process are themselves largely determined by beliefs about the way the world works, mistaken notions about economics and about political processes give birth and sustenance to bad rules. One such mistaken notion is that debt financing of government expenditures imposes no burden on future generations, at least if the debt is owed to fellow citizens.
If this notion were valid, humankind would indeed have discovered the economic equivalent of a perpetual-motion machine: a human-created source of free wealth. Buy splendid good and services today with funds borrowed from your neighbor, promising that she will be repaid in 30-years time by your children, and, lo! and behold!, your acquisition of these splendid goods and services costs neither you nor society as a whole anything. Wow!
Of course, when described in the context of private borrowers, the absurdity is evident of the notion that debt-financing resulting in debt held by people who live nearby is costless. Yet many people suffer under the superstition that if you acquire goods and services today with funds borrowed from your neighbor, not directly by you, but indirectly through the government, then somehow debt-financing becomes a source of goods and services the provision of which is costless to society.
As long as this superstition reigns, there is no hope of restoring for the government a sound fiscal constitution.