On the Timing of the Damage of Debt-Funded Government Activities

by Don Boudreaux on May 28, 2020

in Budget Issues, Debt and Deficits, Other People's Money, Virginia Political Economy

My good and very intelligent friend Brian Mannix left the following comment on this recent post on the burden of government debt – a post in which I recount my amicable disagreement with John Tamny on the burden of debt:

Don, I think there is an aspect of John’s argument that you are missing. When you say that borrowing just postpones the pain, I think you inadvertently concede too much to the big spenders. Some may not care about future generations, or may think (call it MMT) that the game can be played indefinitely.

But John is right that much of the pain — i.e., the misallocation of real resources — is not postponed. If Nancy Pelosi controls 99% of GDP (regardless of how she got it), YOU will have less to eat. Not your children or grandchildren, but you.

Now of course there are incentive effects, and a variety of long-run effects, that we need to consider. But John is right that excessive government control over the real economy, regardless of how it is “funded,” will impose costs in terms of lost human welfare that are suffered today and cannot be postponed by any sort of fiscal accounting. (Full disclosure: I have not read Buchanan’s book, so I may be missing something.)

Much truth resides in what Brian wrote. But clarification is in order.

I begin by repeating a foundational point: Because responsibility for paying for government projects and programs funded with borrowed money is pushed onto future citizens-taxpayers, deficit financing adds fuel to the growth of government today. Even if it’s the case that some of the burden of deficit financing is borne in the current period, deficit financing – by enabling current citizens-taxpayers and government officials to pass along to future generations at least some of the cost of today’s programs and projects – encourages greater growth of government today.

Only if none of the burden of paying for debt-financed expenditures is passed on to future citizens-taxpayer would there be some possible basis for claiming that debt financing doesn’t allow today’s citizens-taxpayers to free ride on the wealth of others. Therefore, even if we stop the discussion here, all of us who wish to keep the size and scope of government limited should oppose deficit financing, or at least have a very strong presumption against government’s use of such financing. No skeptic of big and discretionary government should be dismissive of budget hawks, or ever say that the manner of financing government spending doesn’t matter or is done better with debt.


But to dive down somewhat into the analytical weeds: Buchanan’s goal in his 1958 book (as well as in many later works) was to identify who shoulders the burden of public debt. Specifically, he exposed the fallacy that deficit spending today imposes no burden on future citizens-taxpayers. This fallacy – having been understood as being a fallacy by Adam Smith and most other pre-Keynesian economists – was given a patina of scientific respectability by Keynesianism.

To this end, in his work on public debt, Buchanan paid little attention to the many ways that government today might impose on the economy inefficiencies beyond those that result directly from people today getting to spend other-people’s – that is, future citizens’-taxpayers’ – money. (Buchanan might have responded to Brian’s hypothetical like this: ‘Well, for Nancy Pelosi to get, through the issue of public debt, control over 99 percent of GDP, creditors would voluntarily have to lend the U.S. government an amount of money close to 99 percent of GDP – an unlikely sum.’)

Perhaps Buchanan erred strategically by giving little attention to the full range of costs – to the full array of damages – that arise from deficit financing today. Or perhaps he understood that those who realize that deficit financing encourages excessive government growth today don’t have to be reminded of this reality.

Buchanan waged battle against the Keynesian-fed fallacy that deficit financing is basically a source of free lunches. And to expose this fallacy, he had to show – quite rightly and quite correctly – that, contrary to Keynesian claims, citizens-taxpayers tomorrow do indeed pay for the debt-financed government goodies consumed by citizens-taxpayers today.

If Buchanan were still alive I’m sure that he would agree with Brian that we would all be harmed today if Nancy Pelosi controlled 99 percent of U.S. GDP. He would, I’m certain, point out that the likelihood of her gaining this much control is only furthered by the possibility of deficit financing.


I ended the post on which Brian commented with these words:

Only after I wrote and sent this last e-mail did I realize that one important determinant of when deficit financing today leads government to act in ways that inflict harm on citizens-taxpayers today is when that financing prompts government to act in ways that today’s citizens-taxpayers would not choose. This latter point requires deeper thought and further elaboration.

Were I not now unusually busy I might today venture – probably in vain – to offer useful deeper thoughts and further elaborations. When I concluded that earlier post, I had in mind precisely the sort of issue that Brian raised in his comment.


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