The Economist Who Explained Our Never-Ending Deficits

By Wayne T. Brough

The work of Nobel laureate James M. Buchanan, who last month passed away at the age of 93, remains sorely underappreciated, especially as far as assessing the nation’s fiscal problems is concerned. One of the great economic thinkers of the 20th century, Buchanan applied the tools of economics to the political process and turned many commonly held views of government and politics upside down.

Rather than assume the government exists to correct market failures, Buchanan, and the public choice scholars who followed him, focused sharply on the limitations of government and the possibility of government failure. This research paradigm challenged economic orthodoxy and policy prescriptions that suggested the federal government could actively manage the economy to avoid cyclical disruptions.

Buchanan argued that for most of our nation’s existence, there was an unwritten fiscal constitution that the government was to maintain a balanced budget, practice fiscal responsibility, and not spend beyond its means. Until the early 1900s, this held true, with deficits usually linked to times of war, and paid down quickly once the conflict subsided. Unfortunately, the rise of progressivism and the managed economy abandoned the Victorian balanced budget norm in favor of a greater role for government, and economists began crafting new rules for government spending. Most prominent was the work of John Maynard Keynes, the leading proponent of a more visible government hand in managing the economy. Keynes suggested falling consumer demand could be offset by an increase in government spending.  In effect, the Keynesians launched an institutional shift that favored government action over balanced budgets.

Professor Buchanan spent most of his academic career in Virginia—first and the University of Virginia, then at Virginia Tech, and finally at George Mason University—helping to develop what many call the “Virginia School of Political Economy,” a mix of public choice theory and Austrian economics that places a strong emphasis on the role of institutions as a means of improving society. In this light, the shift in budgetary norms was bound to produce perennial deficits contributing to a permanently increasing debt. As Buchanan noted, “The Keynesian arguments were effective in providing politicians with excuses for acting out their natural proclivities to spend without taxing, as they responded to constituency pressures.”

For Buchanan, it was naïve—even mendacious—to advocate for policy with no consideration for political realities or institutional constraints. Individuals, by definition, will act in their self-interest in both in the private or public sector. But it is institutions that guide that behavior. Buchanan argued that even if Keynesian economics could develop the ideal prescription for a sagging economy, the self-interested behavior of political actors operating within the institutions of government would ensure that the implementation would fail. Reelection is always the preeminent concern for politicians, and the probability of holding onto an office is increased by providing constituents additional goods and services while avoiding new taxes. Additional borrowing and rising debt levels push the burden of this behavior to future generations, a constituency to whom politicians need not appeal.

In his later years, Professor Buchanan spent much of his time emphasizing the importance of identifying and choosing the correct set of institutions for maintaining fiscal discipline. Buchanan felt that researchers spent far too much time in the post-constitutional world, examining behavior under a given set of rules, and not enough time addressing the larger question of which set of rules create the best outcomes for society. The emergence of structural deficits that contribute to a permanent and increasing level of debt suggest that the current institutional setting is not sustainable.

In Democracy in Deficit, James Buchanan and co-author Richard Wagner reveal the ultimate threat to a society’s well-being: “A nation cannot survive with political institutions that do not face up squarely to the essential fact of scarcity. It is simply impossible to promise more to one person without reducing that which is promised to others. And it is not possible to increase consumption today, at least without an increase in saving, without having less consumption tomorrow. Scarcity is indeed a fact of life, and political institutions that do not confront this fact threaten the existence of a prosperous and free society.”

Changes are required, and a balanced budget amendment to the Constitution is one that James Buchanan endorsed. Others, such as new supermajority requirements also may offer constraints on political behavior that provide a greater degree of fiscal prudence. Whatever the solution, Buchanan considered it time to revisit the rules of the game, identifying ways to bring Washington’s behavior in line with the nation’s expectations.

Wayne Brough is the Chief Economist and Vice President of Research at FreedomWorks.

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