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… 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).

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My morning began with writing this letter, to John Tamny, pushing back against his criticism of budget-deficit hawks. John then thoughtfully replied, to which I here offered a second response.

After sending the last-linked note to John, I followed-up with this note:

John,

Another, more succinct, response to your hypothetical budget choice occurs to me. The choice that you pose in your Daily Caller essay and as you summarized it in your last e-mail is this:

Which is preferable to you: $50 trillion in federal spending over the next ten years with none of it borrowed, or $25 trillion in spending over the next 10 years, half of it borrowed? I think the answer is pretty clear. Spending is the problem, not how they get it.

But because the ability to borrow increases government’s incentive to spend, in today’s real world in which government can borrow with little or no restraint, a more realistic choice is this:

Which is preferable to you: $50 trillion in federal spending over the next ten years with half of it borrowed, or $25 trillion in spending over the next 10 years, none of it borrowed? I think the answer is pretty clear. The ability to finance with debt increases spending.

Deficit financing fuels higher spending, a fact that makes the latter choice more realistic than the choice as you pose it.

Don

John and I continued throughout the day to correspond by e-mail. You can read the remainder of our correspondence beneath the fold.

[continue reading…]

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In my column for the September 2nd, 2009, edition of the Pittsburgh Tribune-Review, I took on three events then current that called for some basic economic analysis and common sense. You can read my column beneath the fold (link added).

[continue reading…]

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John Tamny generously, warmly, and intelligently responded to my earlier letter inviting him to join the ranks of government-budget-deficit hawks. Here’s my reply to John’s response:

John:

Thanks for your thoughtful and generous reply to my earlier letter.

The hypothetical choice offered in your article is indeed helpful; it’s this: “Which is preferable to you: $50 trillion in federal spending over the next ten years with none of it borrowed, or $25 trillion in spending over the next 10 years, half of it borrowed? I think the answer is pretty clear. Spending is the problem, not how they get it.”

As an economist I agree that $25 trillion spent by government with half borrowed is preferable to $50 trillion spent by government with none borrowed. But your hypothetical misses the crucial consideration that the amount that government spends is not independent of its ability to borrow. The greater is government’s ability to borrow, the higher will be its spending. (Conveying this reality was a key point of my earlier letter – or, rather, such was my intention even if, as is likely, I failed to carry out my intention very well.) Treating the amount spent as exogenous to fiscal institutions seems to me to be inappropriate.

As I suggested in my earlier letter, my key economic reason for being a deficit hawk is that I believe that reducing government’s ability to fund spending with debt reduces government’s ability to spend – and, hence, reduces its need to tax – over time.

But now let me write not as an economist but as someone looking only at the ethics of the matter. On ethical grounds, I do not agree that lesser spending funded in part with debt is superior to higher spending funded fully with current taxation. The reason is that today’s spending is paid for by future citizen-taxpayers. Explaining why this fact is so – that is, explaining why the burden of today’s deficit spending does not fall on today’s citizens-taxpayers – is the point of Jim Buchanan’s 1958 book, Public Principles of Public Debt.

I believe it to be ethically wrong for today’s citizens to consume at the expense of people who aren’t yet part of the political decision-making process, no matter the amount of this consumption. As imperfect as the political decision-making process is, today’s citizens do have some influence over today’s government decisions. Tomorrow’s citizens have none. It is unethical for today’s citizens-taxpayers to use government to acquire goods and services paid for by individuals who have no say in fiscal choices.

In summary, not only is deficit financing economically destructive, it is ethically troublesome.

Don

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Here’s a letter to John Tamny:

John:

I believe that you’re mistaken to dismiss concerns over government budget deficits (“Federal Deficits Don’t Matter, But Federal Spending Certainly Does”). While it’s true that the correct measure of the amount of resources consumed by government is what it spends, it’s not true – despite Milton Friedman’s suggestion to the contrary – that this figure is distinct from what government takes in taxes. Because debt incurred today must be repaid tomorrow, today’s deficits are tomorrow’s taxes.

In short, the amount spent today by government is the amount that it taxes.

But the timing of taxation matters. By allowing government to spend today and shove the bill onto taxpayers tomorrow, deficit financing enables citizens and government today to spend the money of people many of whom have no opportunity to vote for or against these spending and taxation proposals – many of whom, indeed, literally aren’t yet born.

Precisely because you rightly worry that government spends too much, I invite you to join the ranks of us deficit hawks. We understand that by further divorcing government’s spending decisions from the need to raise the requisite revenue – that is, by further enabling government to spend other people’s money – government spends and taxes more than it would were it required to annually balance its budget.

Sincerely,
Don

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… is from page 19 of Roger Koppl’s excellent 2018 book, Expert Failure (original emphasis):

Under the rule of experts, knowledge is imposed on the system. Knowledge should instead emerge from the system. If knowledge is imposed on the system, it is imposed by someone who imposes upon and therefore dominates others. The persons imposed upon are not in a relation of equality with those imposing a knowledge on society.

DBx: Keep this important reality in mind whenever you hear someone advocate the use of tariffs, subsidies, certificate-of-need regulations, minimum-wage statutes, antitrust restrictions on peaceful business activities and contracting, and FDA-like prohibitions. Those who advocate for such interventions necessarily advocate a truly indefensible inequality: the inequality of power. (Oh, the fact that many such advocates do not realize that they are advocating power inequality does not change the essence of what they are doing.)

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Here’s a letter to the Wall Street Journal:

Editor:

At least two crucial gaps mar Adam Scher’s and Peter Levin’s “Imported Chips Make America’s Security Vulnerable” (May 26).

First, no evidence is offered that the importation of component parts has inflicted on America’s telecommunications and transportation systems any actual harm. The authors serve up only scary hypotheticals.

Second, the authors overlook the most likely reason why they have no examples of actual harm – namely, private firms are driven by strong incentives to avoid importing component parts that will jeopardize their customers’ telecommunications and transportation systems. These incentives don’t guarantee protection against harm, of course, but they do justify counseling against rushing to give government more power to obstruct trade.

Never forget: to grant such power is not necessarily to grant either the knowledge required for it to be used productively or the incentives for it to be used in the public interest.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

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In my most-recent column for AIER, I’m inspired by Tim Worstall’s reaction to American Compass’s new project, “Coin-Flip Capitalism.” Here’s my conclusion:

The ultimate justification for financial markets is simply that they arise when adults voluntarily save and invest. Period. As long as participants in these markets behave peacefully and use only their own funds (or funds voluntarily entrusted to them), their activities need no further justification, regardless of how closely or distantly these markets perform in comparison to some benchmark.

If pundits at American Compass, or professors at Wharton or Wherever U., don’t like the way these markets perform, they are free to offer financial market products that they believe will improve performance. These pundits and professors are free also not to participate in these markets. And they are free to identify the many ways that government interventions distort the operation of financial markets. This latter effort would be welcome and genuinely productive.

But no one has any business advocating, or even hinting at, the use of state coercion to mold financial markets into some different, fancied forms. Such coercion is sure to diminish the positive contributions that financial markets make to the larger economy. Even worse, such coercion would violate the rights of the property owners whose voluntary choices give rise to financial markets.

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James Otteson makes the case that business is honorable and should be taught – and recognized – as such. A slice (which rightly implies that those who advocate tariffs and subsidies are advocates of dishonorable practices):

Cooperative exchange is the foundation of honorable business. Honorable business thus calls on businesspeople to seek ways to benefit themselves only by benefiting others—which means, in essence, that they must put others’ needs, desires, and well-being on par with their own. The honorable businessperson accordingly rejects, on principle, engaging in extractive activity that harms others or that benefits himself at others’ expense. Then he actively searches out cooperative ways he can use his talents, skills, and expertise to generate value for others and to contribute, even if only in a small way, to their well-being—and, ultimately, to their eudaimonia.

Max Gulker warns against micromanagement by the state of the economy’s reopening. A slice:

Whether managed step-by-step or allowed to happen all at once, U.S. businesses will be reopening their doors to an entirely new reality. The process of finding a sustainable and prosperous normal will be messy and involve too much suffering even at its best. But regulations meant to ease the country back to work are more likely to prevent businesses from engaging in an informative discovery process through competition and making the small intuitive adjustments impossible to implement from the top down. Most states, including AIER’s home of Massachusetts, appear to be heading down this dangerous road.

Purdue University president Mitch Daniels offers up in today’s Washington Post a much-need dose of perspective and good sense. A slice:

The companion discovery is that this bug, so risky in one segment of the population, poses a near-zero risk to young people. Among covid-19 deaths, 99.9 percent have occurred outside the 15-to-24 age group; the survival rate in the 20-to-29 age bracket is 99.99 percent. Even assuming the United States eventually reaches 150,000 total fatalities, covid-19 as a risk to the young will rank way below accidents, cancer, heart disease and suicide. In fact, it won’t even make the top 10.

And here’s Jeffrey Singer, MD’s, coronavirus tale.

David Henderson laments the lamentable casualness – indeed, recklessness – with which so many people who should behave better endorse expansions of the size of government.

GMU Econ doctoral candidate – and one of my current research assistants – Jon Murphy, writing at AIER, explains that liberalism was forged out of conflict and troubles.

John Cochrane brilliantly skewers the mix of hubris, ignorance, and appalling self-importance that fuels Stanford U.’s new “school” of sustainability.