Channels, Spring 2018

Page 28 Schwartz • Public Principles and Economic Legacy no effect on rates of consumption and saving. 78 This assumes that each individual’s budget constraint remains identical under neutral, debt financing, and tax financing scenarios, yielding precisely balanced tax and debt liabilities for individuals. This full neutrality can only result if the actual transfers are “allocated so as to balance precisely their correctly assessed shares in the present value of the debt-induced liability.” 79 Given this necessity, Buchanan argued that the debt-funded cash transfers in the present may not correspond exactly to the debt-induced tax liabilities in the future. In this case, the exact offsetting of the effects on consumption of the government operation will be unlikely. Further, if the government uses the present finances to provide public goods and services, Buchanan found it likely that the citizens will consider themselves better off or worse off, contrary to Barro’s neutrality theorem. 80 Finally, the effects on consumption and saving from consumer perceptions of the government debt operation cannot be predicted without knowledge of each individual’s intertemporal utility function. 81 Nevertheless, despite his clear disagreements with Barro, Buchanan explicitly recognized their similar goal in critiquing the Keynesian macroeconomic perspective on public finance. 82 Still, as pointed out above, Buchanan saw harmful conclusions that could be drawn for his own contributions to public finance if Barro’s presuppositions were widely held. Buchanan wrote “Our analysis concentrates on the implications” of Barro’s assumptions. 83 Therefore, in this article, Buchanan returns to the fundamentals of his earlier arguments, even citing Public Principles of Public Debt directly. This allowed him to establish a basic motivation for debt issue: “ As borrowers , individuals are, in effect, drawing down the capital values of their expected income streams in exchange for enhanced levels of spending in the current period.” 84 However, if Barro’s premises hold true and citizens are indifferent between debt and tax finance, “there is no clear motivation for borrowing.” 85 This would indicate a clear theoretical flaw in Barro’s work, given the extensive public borrowing that does occur. Therefore, Buchanan sought to explain government borrowing in terms specifically related to Barro’s model. He wrote, “an increase in the national debt while holding private bequests constant is an exact substitute for a direct decrease in private bequests.” 86 Barro’s neutrality can hold if all individuals and family units seek to leave bequests to their descendants. However, Buchanan developed a more realistic framework which includes Ants – individuals whose utility equilibrium includes positive bequests to heirs – and Grasshoppers – individuals whose utility equilibrium includes no such bequests. 78 Ibid, p. 409-410. 79 Ibid, 412. 80 Ibid, 412. 81 Ibid, 413. 82 “Hence, we have no quarrel with Barro’s basic result, within the stylized distributional assumption of his model.” Ibid, 414. 83 Ibid, 414. 84 Ibid, 415. 85 Ibid, 415. 86 Ibid, 415.