Channels, Spring 2018

Page 22 Schwartz • Public Principles and Economic Legacy significant. Interest rate increases, decreased confidence from government action, and an inability to raise overall demand in the face of price level changes are key problems. Thus, to the authors, Buchanan was correct – government expenditure must be examined in light of government income, not separated. Furthermore, the authors rely on Buchanan explicitly, first in consideration of how fractional reserve banking impacts public debt issue, and then also in relation to the complex assumptions behind Keynesian multiplier theory. 46 If the Keynesians had been considered victorious in the public debt debate, Buchanan’s work would not have been relied on in this fashion. Thus, the literature does not indicate that Buchanan’s contributions were abandoned by the 1970’s, but that they were becoming increasingly impactful. Robert Barro and Ricardian Equivalence Nevertheless, with the publication of an article by Robert Barro in 1974, a new chapter opened in the history of Buchanan’s contribution to the public debt field of public finance. The article “Are Government Bonds Net Wealth?” sought to address the same “expansionary fiscal policy” of Keynesian new orthodoxy that drew Buchanan’s attention in 1959. 47 Yet, the methodology employed by Barro, along with his conclusions, led to a conflict with Buchanan’s earlier synthesis. By framing the public debt in terms of net wealth, rather than burdens, Barro’s article, and subsequent defenses, tended to focus on constructing situations where certain premises might hold in contrast to Buchanan’s concern with the real and present economic and political context of public debt. In his foundational article, Barro contends that government bonds are net wealth if the government has a monopoly on bond liquidity services, or if the government is more efficient at the margin than the market. He begins by postulating a strong form of the basic Ricardian equivalence: [H]ouseholds regard deficit financing as equivalent to taxation. The issue of a bond by the government to finance expenditures involves a liability for future interest payments and possible ultimate repayment of principal, and thus implies future taxes that would not be necessary if the expenditures were financed by current taxation. . . . If future tax liabilities implicit in deficit financing are accurately foreseen, the level at which total tax receipts are set is immaterial; the behavior of the community will be exactly the same as if the budget were continuously balanced. 48 Barro here argued that Ricardian equivalence prevents government bonds from being perceived as additional national wealth; households simply adjust their spending and saving patterns to neutralize the impact of public debt issue. He gives two possible counter- arguments to his application of Ricardian equivalence in the area of public finance. First, 46 Roger Spencer and William Yohe, “The “Crowding Out” of Private Expenditures by Fiscal Policy Actions,” Federal Reserve Bank of St. Louis, (October 1970), 20-21. 47 Robert J. Barro, “Are Government Bonds Net Wealth?”, Journal of Political Economy 82, no. 6, 1095. 48 M.J. Bailey, National Income and the Price Level , (1962), cited in Barro, “Are Government Bonds Net Wealth?”, 1096.