Democracy in Deficit


Democracy in Deficit: The Political Legacy of Lord Keynes, by James M. Buchanan and Richard E. Wagner, New York: Academic Press, 1977, 195 pp., $14.50

The issue of amending the US Constitution to force the balancing of the federal budget will gain momentum in the coming year. The politics of the presidential race and the tax-cut movement will intertwine. In the long run, we may see an amendment to limit government spending—along the lines advocated by Milton Friedman—rather than an amendment to balance the budget; but the real issue for libertarians has little to do with the arguments advocated on either side of the debate.

Buchanan and Wagner have written an impressive, scholarly book on public finance. Subtitled "The Political Economy of Lord Keynes," the discussion in Democracy in Deficit ranges between the economic theory of public finance and the political principles implicit in modern macroeconomic theory. Their conclusion is that the popular neo-Keynesian theory that a central government budget deficit is necessary to stimulate the economy is not only false but, in a democratic society, dangerous. The true price of government-provided services is held at an artificially low level when deficit financing is the means of paying the bill. The taxpaying public is in the short term fooled into supporting welfarist politicians.

We might agree that government budgets should be balanced but disagree over the method of achieving that balance or disagree over the appropriate time frame. Even the Keynesian approach advocates balancing the budget over the business cycle: running a surplus during a boom and a deficit during a bust.

The method of achieving that balance, regardless of the time frame, is an even more sticky issue. Would anyone, besides President Carter, advocate balancing the budget by increasing taxes? This idea might indeed be the net result of an amendment to the Constitution that required an annual balanced budget. Professor Laffer has argued, with good logic and empirical evidence to support it, that cutting tax rates at the margin will so stimulate the supply of goods and services that government revenue would in fact increase, leading to a balanced budget. This is the Kemp-Roth approach.

Just for the record, the radical libertarian approach to public finance advocates a deficit budget—as a corollary consequence of tax resistance. Milton Mueller, director of the Students for a Libertarian Society, advocated as much in a recent issue of Libertarian Review when he suggested that instead of attempting to elect a legislative majority to cut the size of the State, the popular support for libertarian ideas could better be marshaled and realized if the people who otherwise might vote for a libertarian legislator would instead, via direct action, merely stop paying taxes.

Milton Friedman, hardly a radical libertarian, supports a variant of this same idea when he argues that government spending can only be reduced when the budget is in the red, because elected officials will always be led by an invisible hand to spend every available cent they collect. He supports tax cuts regardless of the deficit situation, as a way of forcing cuts in spending. His proposal to limit government spending absolutely, regardless of the budget deficit, is another version of this central idea.

This debate will go around in circles, without any clear resolution. Libertarians will be found in every corner, with the radical libertarians plaguing all who support taxation in any form.

Buchanan and Wagner, however, in one excellent chapter entitled "The Presuppositions of Harvey Road," raise the issue of government economic policy itself. The presuppositions that underlie the theory that budget deficits are necessary to "fine tune" the economy over the business cycle are fundamentally totalitarian. Keynes and his followers believed that a wise, aristocratic elite can run the economic policy of the government, much as a benevolent despot would, to assure full employment, prosperity, and welfare benefits for all. The relative immunity of this wise elite from democratic processes is the assumption behind their proposal for budget surplus during the boom years—a phenomenon that never surfaces in the real world.

More significant, however, than the specifics of the false theory of the neo-Keynesians is the constructivist fallacy on which it is based. This is the contribution of Prof. F.A. Hayek to modem social theory. The constructivist fallacy is the belief that by specific design and direct action the government can improve society. The fallacy assumes that society is static, or mechanistic, in its functioning. Because society is dynamic and made up of individuals, of course, the constructivist point of view is erroneous; but this has never stopped economists from proposing one gimmick after another to "fine tune" the system. Buchanan and Wagner, by arguing for an amendment to the Constitution to outlaw deficit financing, are in fact advocating that constructivist economic policy be forever banned from these shores.

Not surprisingly, many economists are opposed to the idea of a constitutional amendment to achieve this. Milton Friedman's proposal, for example, to limit spending but not to require a balanced budget retains elements of the constructivist fallacy. His well-known formula for limiting the rate of growth of the money supply is another example, because it stipulates a rate of increase "consistent with long-run stability of the price level." Both F. A. Hayek and Ludwig von Mises would argue that a stable price level is a nonsense concept, and tinkering with the supply of bank reserves—even under a "monetary rule"—is an attempt to outsmart the market process.

The market process cannot be outsmarted or improved upon by government economic policy. It can only be constrained and forced to a lower level of economic welfare for the society as a whole by government restraints on trade. Buchanan and Wagner, to their credit, have now carried this argument to the macroeconomic level. Not only will free markets and unrestrained trade optimize the allocation of resources and general welfare of every participant in the market, the "chains of the Constitution" clamped upon the meddlesome hands of the macroeconomic policymakers will produce a healthful climate for economic freedom and genuine economic growth without inflation.

Joe Cobb is the director of the Energy Project of the Council for a Competitive Economy.