Channels, Spring 2018

Page 14 Schwartz • Public Principles and Economic Legacy Buchanan’s work is utilized today. In many technical works, the application of Buchanan’s principles and applied models is unfortunately lacking. However, prominent economists in the current debate over public debt, particularly in the United States, still utilize Buchanan’s work as they consider the empirical and institutional situation of public finance today. Lastly, there is a presence of some of Buchanan’s most salient points in current textbooks, even those from economists generally inclined to different ideological conclusions than Buchanan. This suggests a successful penetration of Buchanan’s public debt theory into the field, but the possibility of further growth and improvement for public finance if Buchanan’s work is properly understood, especially along his Public Choice analyses. The Impact of Public Principles – Buchanan and the Keynesians In Public Principles of Public Debt , Buchanan lays out the core ideas of the Keynesian orthodoxy of his day and then presents his arguments in a clear contrast. The first and most seminal point of contention is whether or not the burden of debt is shifted into the future. For Keynesians, the answer was no; the cost or burden of the debt is “the real sacrifice of private goods and services” that the government spending requires, and this sacrifice must occur in the present. 3 There is no burden in the future because the interest payments and tax payments resulting from the debt are both located in the future. The costs of tax payments are balanced by the benefits of interest payments such that public debt in the future is something which we simply owe to ourselves as a nation. This national aggregation and future balance perspective is the crux of the Keynesian argument on public debt. Buchanan disputes the premises and conclusion that his opponents offered, arguing instead for a potential future burden from public debt issue. To Buchanan, the present bondholders do not bear the burden of the debt because they are not making a sacrifice. They freely choose to lend because it meets their preferences – they are moving to a higher, not lower, position on their individual utility surfaces. 4 Unless this were true, the bondholders would not have chosen to voluntarily surrender their present consumption for the delayed gratification of the bond. Under standard theory, this voluntary choice indicates the highest expected utility curve. The future taxpayers, on the other hand, are compelled to pay more than they would have without the public debt issue, and they do so without the guarantee the bondholders receive of a preferred future asset. Thus, the burden of the debt does not fall on present bondholders, but on future taxpayers. Buchanan argues that the answer to burden incidence becomes obvious upon asking a simple question: “Who suffers if the public borrowing is unwise and the public expenditure wasteful?” 5 Even if this harmful scenario occurs, the present bondholder is not injured more than otherwise – he still has interest payments to compensate for the shift in his income stream as he would under a beneficial and wise public spending. Thus, as current 3 James Buchanan, The Collected Works of James Buchanan: Volume 2 - Public Principles of Public Debt: A Defense and Restatement , (Liberty Fund Inc., Indianapolis: IN, 1999), 6. 4 Ibid, 28. 5 Ibid, 32.