Channels, Spring 2018

Channels • 2018 • Volume 2 • Number 2 Page 15 taxpayers are not bearing the burden for the given public expenditure, future taxpayers must do so. Through its group focus, the argument that the impact to national finance in the future is balanced between tax payments and interest payments misses the importance of the individual. The bondholder’s individual balance sheet properly includes both the present reduction and future increase in income stream, while the future taxpayer’s individual balance sheet is reduced by tax payments and only increased by the personal value of whatever social or economic asset the public debt creates. 6 Thus, Buchanan overturned the Keynesian orthodoxy on the burden of public debt by correcting the level of analysis and reevaluating the idea of a bondholder’s sacrifice. Having undermined the fundamentals of the Keynesian position, Buchanan next considered whether its proponents were correct in arguing broadly that private debt and public debt were unrelated. Buchanan’s opponents contended that public debt is not a reduction from the national income stream - as private debt reduces an individual’s income stream - because future interest payments offset future tax payments. Public debt only creates future transfers within the nation, thus not reducing national wealth by this reckoning. This is usually expressed in the statement concerning public debt that “we owe it to ourselves.” One Keynesian wrote: “Thus an internal loan raised by the state is not really a loan in the ordinary sense since it possesses none of the essential characteristics of such a transaction.” 7 Clearly, this point is tied to the previous one about the location of the burden of the public debt and how this should be considered. Therefore, Buchanan ties the two considerations together to present the Keynesian position: an individual borrower gains wealth in the present but must face a sacrifice in the future. However, the public borrower does not face a sacrifice in the future because interest and tax payments balance. To refute this argument, Buchanan appeals to something he believes the Keynesians missed: “ only the decrease in the net worth of the taxpayers may be attributed to the fiscal operation under consideration. ” 8 Buchanan notes that bondholders would have chosen to lend with or without the public debt issue. Their interest payments would remain absent the issue of public debt, stemming instead from private capital investment. By contrast, the taxpayers’ loss due to future tax increases is a unique feature that would not have occurred without the public debt. Therefore, understanding the national outcome of public debt as equally good for bondholders and bad for taxpayers, and thus neutral on net, as the Keynesians proposed, is incorrect. The loss of the taxpayers through increased tax payments is an unmitigated burden from public debt, paralleling an individual’s loss in future interest payments. On Buchanan’s arguments, the analogy between individual and public debt holds, despite the contentions of the Keynesian new orthodoxy that public debt was uniquely non-burdensome. 6 Ibid, 33. 7 Jorgen Pederson, cited by James Buchanan in Public Principles of Public Debt , (Indianapolis, 1999), 38, cited from Alvin H. Hansen, Fiscal Policy and Business Cycles, (New York, 1941), 142. 8 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), 42.