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Quotation of the Day…

… is from page 345 of the original edition of James M. Buchanan’s 1960 textbook, The Public Finances (a book that isn’t included in Buchanan’s Collected Works):

The problem is precisely that of locating the individual or group of individuals who does “pay for” the benefits secured from the public outlay, quite independently of whether or not the outlay itself is productive or unproductive. Debt issue tends to shift this burden of payment onto the taxpayer in periods subsequent to the debt issue-expenditure operation. Taxation, by contrast, places the burden on individuals living during the period when the expenditure is undertaken. This is the basic difference between the two methods of financing public expenditures, and the failure to recognize this point can only lead to confusion.

DBx: Government spending, no less than private spending, is the spending of resources. Resources don’t fall from the sky; they aren’t free. This reality is inescapable regardless of the merits of the spending.

A key question is: How does government acquire the resources that it uses (“spends”)? There are four possible methods, which conventionally are called (1) taxation, (2) borrowing, (3) inflation, and (4) regulation. (Resort to the last of these options nominally keeps resources in the hands of private citizens, but government nevertheless determines through its directives just how those resources are used.)

These terms are acceptable; they convey meaning. But they also hide an important aspect of reality. All of these methods are a form of taxation. That which is called “taxation” is simply the most straightforward and ‘honest’ method that government uses to acquire resources. That which is called “taxation” is the overt taking of resources (in the form of money) from people during the same accounting period in which the money is spent by government.

Government takes resources when it inflates – that is, when it spends newly created money. But this method of taxation is surreptitious and is meant to be so. Widespread economic ignorance causes private merchants to be blamed for the rising cost of living despite the fact that the cause is government.

Government takes resources when it borrows no less than when it overtly taxes, inflates, or regulates. But the resources that government takes when it borrows are taken not from current citizens-taxpayers, despite the fact that during the current period government does indeed gain command over more resources as a result of its borrowing.

The resources over which government immediately gains command as a result of its borrowing are loaned to it by creditors voluntarily. But these creditors obviously are not the persons who pay for whatever projects and programs are carried out with the borrowed funds. To repeat an example from this post of yesterday: the mortgage company that loaned me the funds that I used to buy my condominium did not pay for my condominium. The entity that paid for my condominium is me.

And just as I am put on the hook to spend money in the future to repay my creditor, future citizens-taxpayers are put on the hook to repay government’s creditors. This fact makes it appropriate to describe government debt issue as future taxation.

Government debt issue no more avoids taxation to fund government’s operations than does borrowing from a mortgage lender avoid spending to buy a home.

Buchanan is correct to emphasize, in the above quotation, the importance of accurately identifying who pays for the projects and programs on which the borrowed funds are spent. And to accurately make this correct identification, nothing at all turns on whether the expenditures in question are worthwhile or wasteful. But – and this “but” is big – because government debt issue allows today’s citizens-taxpayers (and government officials themselves) to gain benefits that are paid for by other people (namely, future citizens-taxpayers), as a practical matter the ability to borrow ensures that government will spend more, and spend more wastefully, than if it were compelled somehow to balance its budget over fairly short periods (say, annually).