Channels, Spring 2018

Channels • 2018 • Volume 2 • Number 2 Page 31 finance exert differing effect on observed political outcomes.” 96 Thus, under a regime of debt finance, individuals will tend to “purchase” more public goods and services through borrowing than they would through taxation. Further, Buchanan also notes an inflationary bias – individuals will borrow a higher percentage for government revenue than is optimal. 97 Buchanan’s public choice insights are not limited to comparisons of different methods of public finance but extend to the likely impact of changing political institutions on those methods. Thus, “Changes in tax institutions, for instance, will normally change the tax shares and tax prices assigned to different persons. This, in turn, will alter individual responses to particular budgetary patterns.” 98 The critique of Keynesian theory that the public choice analysis allows is powerful: The direct effects of budget deficits are sensed only in terms of personal gains. The creation or increase of a deficit involves a reduction in real tax rates, an increase in real rates of public spending, or some combination of the two. In any event, there are direct and immediate gainers, and no losers, regardless of whether the economy suffers from Keynesian unemployment. 99 Not only does public choice strengthen and diversify Buchanan’s attacks on Keynesianism, it also provides a platform for further rejection of Ricardian equivalence. He argues first that the theorem embodies unrealistic knowledge expectations for its citizens. This does not address equivalence on technical grounds but rather the basis for decision by the relevant agents. Buchanan addresses incentives more directly as well, arguing that the taxpayer may not and need not consider long-run consequences of behavior. 100 In the long run, the taxpayer will have perished, receiving the benefits of the investment, hopefully without having to pay for it all. While the taxpayer may certainly consider the future costs for his descendants as taxpayers, he is not required to have enough virtue to do so. Because debt issue transfers burdens to the future, it “creates incentives for increased public spending” for which Ricardian equivalence fails to account. 101 Another example of Buchanan’s use of public choice in the realm of public debt comes in his 1986 article “Public Debt and Capital Formation.” The public choice framework is clearly implanted throughout the article, such as when Buchanan simply states, “There is no difference between individual, firm, agency, or public borrowing.” 102 Thus, Buchanan is able to move to the argument that government’s failure to use debt finance to fund long- term investments is analogous to individual borrowing for the purpose of consumption. In this case, “Debt issue becomes equivalent to the ‘eating up’ of capital value, pure and 96 Ibid, 101. 97 Ibid, 101. 98 Ibid, 99. 99 Ibid, 105. 100 Ibid, 145. 101 Ibid, 145. 102 James Buchanan, The Collected Works of James Buchanan, Vol. 14, Debt and Taxes, “Public Debt and Capital Formation,” (Liberty Fund Inc., Indianapolis: IN, 1999), 368.