Channels, Spring 2018

Page 26 Schwartz • Public Principles and Economic Legacy establish a clear rationale for why the government would act as he proposes. 64 Questioning Barro’s assumption that “‘the increase in B, [public debt] implies a one-to-one increase in the asset supply,’” given the naturally resulting reduction in private investment or consumption, Buchanan simply declared Barro’s model “bizarre.” 65 Buchanan continued with a number of further objections to Barro’s presuppositions and conclusions on practical, not mathematical grounds. For instance, Buchanan critiques him as being too willing to generalize from the example of Social Security, leading to a flawed and restricted conclusion rather than a universally applicable model. 66 Buchanan’s most powerful critique came on empirical examination of the behavior of public officials: “The proclivity of politicians to expand public debt in preference to tax increases” demonstrates an assumption against Ricardian equivalence. 67 While Barro might have been able to discern a rational official purpose behind the movement of the debt through mathematical regression, Buchanan saw a different relation in real-time. This difference marks Barro’s model as improperly founded on incorrect premises regarding the behavior of households and politicians in the event of public debt issue. Further, Buchanan noted that Ricardian equivalence would predict no change in the savings rate as a result of Social Security, but this does not match the measured decrease in private saving in the United States. 68 If both government officials and private individuals do not act in accordance with Ricardian equivalence, then it should not be accepted. Despite the correlative evidence that Barro produced, his premises do not reflect reality. Therefore, his model does not hold over a large range of behavior. Buchanan thus held his ground in terms of the more technical elements of public debt analysis, as well as his constitutional conclusions in his initial response to Barro’s arguments. Buchanan continued his critique of Barro implicitly by examining the fundamentals of Ricardian equivalence in another article. While the overall topic of the article is Ricardian equivalence as such, Buchanan cited Barro on the first page as an example of the “surprising resurgence” in the idea’s application to economic analysis, demonstrating the clarity of the debate taking place. 69 In rebutting Barro’s use of the Ricardian equivalence theory here, Buchanan argues that Ricardian lump-sum taxation is not the conventional model and that proportional income taxes is more appropriate, which alters the basic analysis. 70 64 “He [Barro] states …’It can be assumed, for simplicity, that the government bond issue takes the form of a helicopter drop to currently old (generation 1 households).’ We are immediately prompted to inquire why any government would undertake such an activity.” James Buchanan, The Collected Works of James Buchanan, Vol. 14, Debt and Taxes, “Barro on the Ricardian Equivalence Theorem,” (Liberty Fund Inc., Indianapolis: IN, 1999), 385. 65 Ibid, 386. 66 Ibid, 389. 67 Ibid, 390. 68 Ibid, 390. 69 James Buchanan, The Collected Works of James Buchanan, Vol. 14, Debt and Taxes, “The Logic of the Ricardian Equivalence Theorem,” (Liberty Fund Inc., Indianapolis: IN, 1999), 392. 70 Ibid, 396.