… is from page 112 of my colleague Richard Wagner’s superb 2017 intellectual biography of our late Nobel-laureate colleague, Jim Buchanan: James M. Buchanan and Liberal Political Economy :
If a battleship is financed by taxation, it is clearly taxpayers who turn over the resources necessary to build the battleship. But what if bondholders provide those resources by buying government bonds? It’s not reasonable to claim that the bondholders bear the cost of the battleship. Indeed, they have gained personal advantage by buying bonds. The voluntary purchase of bonds means that bondholders have traded opportunities they value less highly today for opportunities they value more highly tomorrow. Buying debt enables the bondholders to achieve a superior intertemporal pattern of consumption opportunities. Bondholders rearrange their temporal pattern of consumption, consuming less today and more tomorrow, and experience an increase in their present valuation of their intertemporal pattern of opportunities. Present taxpayers, moreover, don’t pay higher taxes to finance the battleship, as the purchase of bonds by bondholders replaces the higher taxes that taxpayers would otherwise have paid. The only option is that it is future taxpayers who now face smaller consumption opportunities due to the burden they will bear to retire public debt. Hence, public debt allows the cost of public spending to be transferred forward in time.
And so there is no good reason to believe that the building of this battleship is justified – that is, that it is not an instance of excessive, and hence wasteful, government expenditure. The ability of today’s citizens to acquire for themselves a government good that is to be paid for by other people – namely, tomorrow’s taxpayers – means that today’s citizens will spend more recklessly than they would spend if they were required to fund all of today’s programs with currently collected taxes.
The size of the government budget is not independent of the means used to finance it. Let me repeat, with emphasis, this central reality: The size of the government budget is not independent of the means used to finance it. If among these available means is borrowing, the cost today to citizens and their political representatives of spending is lower than it would be were borrowing not an option (or were an option that is especially difficult to use). And the lower the cost of any activity, the more that activity will be pursued.
It follows that the more readily government is able today to fund its projects and programs with borrowed funds, the more projects and programs government will today undertake. The same point put differently is this: Deficit financing translates into greater government spending – into larger government budgets – into greater government influence over the economy – into more government waste and inefficiency.
Therefore, anyone who truly wishes to reduce government spending and imprudent uses of resources should be at the forefront of those who oppose the financing of government budgets with borrowed funds. I repeat yet again, this time with appropriate coloration: The size of the government budget is not independent of the means used to finance it.