The Corner

Politics & Policy

Don Boudreaux on James Buchanan on Government Borrowing and Spending

Sheets of $1 bills get rotated before being cut into individual pieces during production at the Bureau of Engraving and Printing in Washington, D.C., November 14, 2014. (Gary Cameron/Reuters)

If you took economics from a Keynesian, you might recall hearing that government deficit spending is sometimes necessary to stimulate an otherwise sluggish economy, and that there is no reason to worry about the debt because “we only owe it to ourselves.” That kind of thinking is currently espoused by Modern Monetary Theory advocates, as well as politicians who want to spend endlessly on their favorite things.

Such thinking is completely unrealistic, as Nobel Prize winner James Buchanan explained back in a 1958 book. In this AIER article, Professor Don Boudreaux applies Buchanan’s logic. After reading it, there is no excuse for maintaining the fairyland view that when government borrows there is no actual cost. Boudreaux writes, “Government borrowing changes the identities of the particular taxpayers who incur the costs of government projects; government borrowing does not, however, enable taxpayers — considered as a group over time — to escape these costs.”

So divorced from reality are many of our political leaders and opinion shapers that they have people thinking that government can (and should) borrow and spend without limit to achieve the wonderful society they envision. Boudreaux enlightens they as to scarcity and opportunity costs.

He writes: “But let’s assume, contrary to fact but for argument’s sake, that an actual government — an agency with a monopoly on the lawful authority to initiate coercion — can forever fund all of its operations with borrowed funds. This fairytale government repays and services all of its debts simply by borrowing, infinitely into the future. Contrary to the belief of many, this situation would be especially bad for freedom and free markets. Government would grow even larger and more intrusive.”

In other words, it would put us on track for, to borrow the title of a book by Ludwig von Mises, omnipotent government. That’s their goal.

All government actions shift resources from whatever they would otherwise be used for to the purposes determined by the rulers. Imagine a long-ago emperor who decides that he needs a lot of castles to protect his realm. He doesn’t have much money, so he decrees that thousands of workers must labor on them and that the stone, wood, and other materials will be seized from their owners.

The castles go up, apparently at no cost. But there was a cost — the loss of output from those workers and the materials consumed. It would be no different than if the emperor had taxed the people to pay for “their” castles or if he had borrowed from financiers or had created money through inflation.

Frederic Bastiat called government the great fiction through which we try to live at the expense of everyone else. It can try to hide the expense, but can’t make it disappear.

George Leef is the the director of editorial content at the James G. Martin Center for Academic Renewal.

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