Russell Roberts's Blog, page 460

Quotation of the Day…

(Don Boudreaux)

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… is from pages 29-30 of the 1999 Liberty Fund edition of my late Nobel-laureate colleague Jim Buchanan’s first book – namely, his great if sadly neglected 1958 volume, Public Principles of Public Debt:

In an individualistic society which governs itself through the use of democratic political forms, the idea of the “group” or the “whole” as a sentient being is contrary to the fundamental principle of social organization. The individual or the family is, and must be, the basic philosophical entity in this society.

DBx: Jim died, at the age of 93, seven years ago today.

Bonus Quotation of the Day…

(Don Boudreaux)

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… is from page 299 of the 1975 HarperPerennial printing of the third (1950) edition of Joseph Schumpeter’s profound 1942 volume, Capitalism, Socialism, and Democracy:

The essential point to grasp is this. No responsible person can view with equanimity the consequences of extending the democratic method, that is to say the sphere of “politics,” to all economic affairs.

DBx: Schumpeter died 70 years ago today.

The Burden of Deficit Financing is Real II

(Don Boudreaux)

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Here’s a letter to the great Deirdre McCloskey who e-mailed to me the following (link added):

Dearest Don,,

Your elegant piece on the AIER site about The River of Public Debt is great.  I do wish that Jim Buchanan had had your lucidity and grace. But I think I know what, say, Larry Summers would reply.  “If the project that the government spends the bonded money on is beneficial to future generations–say, defeating the Axis in World War II–than hurrah for deficit financing!  Future generations would be like Smith and Williams, that is, if the governmental factory is giving goods instead of bads to them.  And so here I have a ton of governmental ‘investments’ we ought to make, now.”  Yes, I know: a blank check.  But then that is the problem.

Love,

Deirdre

….

Dear Deirdre:

You’ve made my day with your too-kind words about my AIER column on government debt. Thanks!

You’re correct about how someone such as Larry Summers would reply to my (and to Jim Buchanan’s, and to Dick Wagner’s, and to Veronique de Rugy’s) warnings about the dangers of deficit financing. That someone would observe, and correctly so, that if projects financed today with debt are wise and prudent – so wise and prudent as to raise the economy’s productive potential above what it would be absent these projects – then even those future citizens-taxpayers who must repay the debt are blessed by this deficit financing rather than burdened.

Buchanan, of course, never denied such a possibility. Nor do I. But he insisted on the recognition of two realities. First, the costs of even the most wonderful government programs that unambiguously improve the lives of future generations are paid for, not by the generation that borrows to pay for the programs, but by future generations. That these programs might be well worth their costs means neither that they are free nor that the responsibility for paying these costs is not shifted by the generation that borrows onto the generations that repay the debt.

Second, because deficit financing allows today’s citizens-taxpayers to spend the money of other people – some of whom aren’t even yet born – there is little reason to suppose that these monies will, in reality, generally be spent wisely. Such spending, as your closing words suggest, is far more likely to be wasteful: a transfer of benefits from future generations to the current one.

The ‘Larry Summers’ response proves too much. Suppose that Summers encounters someone who argues for legalizing theft on the grounds that thieves can be imagined to spend stolen booty in ways that, compared to how their victims would spend the money, are more likely to promote the well-being of their victims. Summers would have to concede that such an outcome is possible.

But he would surely not regard this possibility to form a credible case for legalizing theft. Summers understands that people who spend other people’s money generally spend that money wastefully, not only from the perspective of the other people whose money is spent, but from that of society at large. Once we recognize that deficit financing allows people today to spend other people’s money, we have no good reason to believe that this spending generally will be in anyone’s interest other than that of those who do the spending.

Sincerely,

Don

The Burden of Deficit Financing is Real

(Don Boudreaux)

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Here’s a letter to Café Hayek commenter James Leonard Hudson:

Mr. Hudson:

Thanks for your comment in which you express disagreement with my AIER column titled “A Swollen River of Indebtedness.” Specifically, there I argue – inspired by the work of my late Nobel-laureate colleague James Buchanan (some of it done with my current colleague Dick Wagner) – that deficit financing of today’s government spending is paid for by future taxpayers, for it is they to whom the bills for today’s deficit-financed spending are sent. Because deficit financing allows government to spend other-people’s money – other people many of whom aren’t yet born, and so who are taxed without representation – government spends excessively.

Against this argument you object that I “ignore the fact that we present people do not actually have to repay the debt piled up by our fellow citizens of the past: instead we can kick the can down the road, borrowing enough and even more than enough to pay for maturing debt and for the interest on continuing debt.”

With respect, your objection misses the mark.

First, no one denies that government debt can be rolled over. Nothing in Buchanan’s analysis of the burden of public debt identifies the precise timing of when future taxpayers bite the bullet and actually repay any part of, or the whole of, accumulated debt. And of course kicking the debt can down the road is precisely what all generations of citizens-taxpayers have incentives to do. But ironically, the greater the ability of each generation of citizens-taxpayers to kick the debt can down the road, the stronger and more-relevant is Buchanan’s analysis, for…

Second, the core economic problem created by deficit financing is resource waste. (The core ethical problem is living at the expense of others.) The ability of people today to stick future generations with the obligation to service government debt is, it bears repeating, the ability of people today to live at the expense of other people. This ability causes resources to be wasted today but with the cost of such resource-waste borne by people tomorrow. Thus, even those citizens-taxpayers who tomorrow will roll-over the debt suffer a burden from today’s deficit financing because tomorrow’s economy will be less productive than it would be absent the resource waste caused by today’s deficit financing.

It’s important not to let a focus on the monetary side of the ledger blind us to the real-resources side. Whether citizens-taxpayers in 2030, 2050, 2120, or 17776 roll-over, repay, or repudiate government debt incurred in 2020, the fact remains that the ability today to consume through government at the expense of future generations causes people today to consume too many resources through government, thus reducing the rate of economic growth.

And the fact that market forces have so far proven to be powerful enough to ensure that future generations are nevertheless more prosperous than past generations means neither that this happy trend can withstand any amount of resource waste caused by deficit financing, nor that we today are ethically entitled to waste resources at the expense of our wealthier children and grandchildren.

Sincerely,

Donald J. Boudreaux

Professor of Economics

and

Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center

George Mason University

Fairfax, VA 22030

Pittsburgh Tribune-Review: “A dollar dump? Not Likely”

(Don Boudreaux)

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In my November 30th, 2007, column for the Pittsburgh Tribune-Review I did my best to calm the fears of those who worry that non-Americans who hold dollars and dollar-denominated assets will suddenly dump them and thereby inflict economic harm on Americans. You can read my column beneath the fold.

(more…)

Quotation of the Day…

(Don Boudreaux)

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… is from pages 2-3 of Tulane University philosopher Eric Mack’s 2018 book, Libertarianism:

According to the libertarian, at least as a first approximation, ordinary norms of morality require that harmful force or the threat of such force be used against individuals only to defend against or extract restitution for, or to punish initiated force or threat of force, or to enforce compliance with voluntary contracts. Hence, state use of force and the treat of force must also be confined to the functions of defense, restitution, punishment, and the enforcement of contract. Libertarians maintain that the enforcement of a framework within which individuals are secure in their persons, possessions, and contractual arrangements is the key condition for the emergence of a peaceful, tolerant, and prosperous social and economic order. Radical restriction on state action is the key to a flourishing cooperative society.

DBx: It’s commonplace for people who are hostile to libertarianism and classical liberalism to respond to an introductory description of libertarianism, such as this one offered by Eric, by noting that the application of such an ideal in reality requires that substantive content be given to concepts such as restitution (e.g., “Are the sins of the parents inherited by the children?”), possessions (e.g., “Does Smith’s property in his home include the possession of the ability to exclude his neighbors from partying loudly on Tuesday nights? Or do Smith and his neighbors possess the right to party loudly on Tuesday nights?”), and “persons” (e.g., “Do pregnant women have the right to terminate their pregnancies on day 279? Or is each fetus on that day a person with a right not to be killed? What about on or after day 90? Or day one? And do biological fathers have any say in the matter?”)

Of course these and an almost-literally countless number of other detailed questions must be answered, and answers given today can – and often do – change as time passes. Also, reasonable people can and do disagree over what the details of the answers are.

Every sensible libertarian understands and accepts this reality.

Nothing about this reality is unique to libertarianism. Each and every moral and political philosophy must begin with a set of general principles whose applications in reality are not fully determined by any statement, no matter how eloquent, of its general principles. Yet it’s vitally important both to begin with sound general principles – principles that, when good-faith efforts are made to follow them, lead generally to good results – and to articulate these general principles with clarity and concision that make them useful guides for how to answer reality’s multitude of challenging questions.

Bonus Quotation of the Day…

(Don Boudreaux)

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… is from this new EconLog blog post by Art Carden titled “The Simple Economics of Pornography”:

To paraphrase Sheldon Richman, however, just because some people cannot be trusted with liberty does not mean other people can be trusted with power.

DBx: No single human inclination has done more harm to humanity than that which turns us to power as the first and surest ‘solution’ to problems imaginary and even real.

Government Creates More Negative Externalities Than It Eliminates

(Don Boudreaux)

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In my most-recent column for AIER I explain that deficit financing of government spending creates negative externalities no less than would a factory owner who disposes of his factory’s wastes in an open-access river with households and other businesses downstream. The logic of my explanation is a straightforward application of sound reasoning from Econ 101, and is inspired by my late Nobel-laureate colleague, Jim Buchanan – whose works on both public finance and on externalities are pioneering and important, yet unfortunately still today largely ignored even by economists.

Here’s a slice from my column:

With deficit financing, government spending is excessive. Just as persons located downstream on an open-access river helplessly suffer the burden of excessive amounts of pollutants emitted by factories located upstream, citizens-taxpayers in the future helplessly suffer the burden of excessive debt borrowed by government in the present. The very same economic logic that tells us that a factory’s open-access to an unowned river results in excessive pollution tells us also that government’s open-access to future-taxpayers’ purses results in excessive government spending.

And therefore, just as the problem of river pollution won’t be solved merely by changing the identity of the owners of upstream factories, the problem of excessive government spending won’t be solved merely by changing the identity of the representatives of citizens-taxpayers. In the same manner that a solution to the problem of excessive emissions of pollutants requires meaningful and enforceable restraints on the actions of those who would pollute other people’s properties, a solution to the problem of excessive government spending requires meaningful and enforceable restraints on the actions of those who would spend other people’s money.

…..

Actually, future citizens-taxpayers of a deficit-financing government fare worse than do households and businesses located downstream on an open-access river from a waste-dumping factory. The reason is that it’s easier for those along a river bank to move away – or not to move there to begin with. It’s much more difficult for future generations who are citizens of a country to move from that country, and impossible for them to choose not to ‘move’ there to begin with.

Some Links

(Don Boudreaux)

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Richard Ebeling expresses his objections to Tyler Cowen’s “state-capacity libertarianism.” A slice:

Why do so many people accept the notion that imposing and raising legal minimum wages are good for people at the lower income levels? Do they have some inexplicable “propensity” to demand higher wages for others through government mandate as their own economic circumstances improve? I think the more reasonable explanation is a failure to understand and appreciate all the implications of the logic and reality of supply and demand in labor markets. That is, it is the result of wrong and faulty ideas that are sometimes easier to impress upon people than the often abstract and indirect chains of causation through which market processes operate, including in the demand for labor.

David Henderson expresses his objections to Fabio Rojas’s case for subsidizing undocumented aliens.

John Tamny expresses his objections to Roger Robinson’s economically uninformed fear-mongering about China.

Shikha Dalmia expresses her objections to Trump’s visa-wall against non-American students.

Kerry McDonald expresses her objections to government regulation of home-schooling.

James Rogers expresses his objections to the narrative of middle-class economic stagnation. Here’s his conclusion:

The telling point about income, however, should not be lost in these weeds. Contrary to seemingly ubiquitous claims of income stagnation, the data show incomes for all American households increased substantially over the last generation. The data also show existing tax and transfer policies have in fact had their intended effect, with a substantial redistribution of income gains from the richest Americans to the poorest Americans. The data do not support a central economic claim of both left and right critics of neoliberalism.

Quotation of the Day…

(Don Boudreaux)

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… is the closing line of James Buchanan’s September 1966 Journal of Finance article, “The Icons of Public Debt”; it appears on page 364 of the reprint of this article in Debt and Taxes (2000), which is volume 14 of the The Collected Works of James M. Buchanan:

Let us try to invent more complex and abstruse means of stating the simple propositions; only then can we perhaps carry conviction with the majority of modern economists.

DBx: There are a variety of reasons why too many economists discount, and in some cases almost completely ignore, the elementary propositions of economics that, in my opinion, alone give the discipline of economics scientific legitimacy. A partial list of the reasons why what the late Paul Heyne called the economic way of thinking is not the way of thinking of many economists include:

– Once grasped, the basic principles of economics appear to be too obvious to be the tools of rigorous Scientific work; the thinking seems to run along these lines: ‘Explaining economic reality must require more complex tools and models than these relatively few and obvious ones.’ So the truly scientific core of economics is jettisoned and replaced with complicated tools and models that appear to be Scientific.

– To grasp the basic principles of economics is to become awe-inspired by the marvels of the creative and coordinating powers of free markets and, simultaneously, also to become deeply skeptical of the ability of governments to improve matters with any of the various interventions that are ever-popular. I suspect that many economists resist what they wrongly interpret to be an ideological bias stirred in those who adhere to the economic way of thinking. Admirably committed to being unbiased and scientific, some economists who grasp the economic way of thinking ironically temper it under the wrongheaded assumption that only then will they be – or only then will they appear to their colleagues and the general public to be – unbiased, scientific, and professional.

– Economists remain enchanted by scientistic fallacies and, thus, believe that economic science is much like astronomy: the role of the economist is believed to be to observe as carefully as possible the objective ‘facts’ of economic reality, to measure and record these ‘facts,’ and then to report these ‘facts’ in much the same way that an astronomer observes, measures, records, and reports the facts of the cosmos. (To anticipate an objection: In this paragraph I put scare quote-marks around ‘facts’ not because I believe there to be no true facts of economics; I most certainly hold no such belief. Rather, the scare quote-marks indicate that far too much of what economists treat as facts are artifactual constructions – such as “the” energy sector, or “the” top one-percent of income earners – the boundaries and substances of which are far more fluid and judgment-determined than is realized by economists who theorize about these ‘facts.’)

– Related to the point just above is the fact (!) that economic training more and more is training in technique and a corresponding crowding-out of attention to price theory and, more generally, the economic way of thinking. Students who excel at mathematics, data processing, and computer science are attracted to economics while students who would excel at doing price theory and who have a knack for the economic way of thinking are discouraged from pursuing advanced study in economics.

– Non-economists – and especially journalists and politicians – are excessively impressed with economists whose works look Scientific and who offer precise numbers and detailed predictions. Yet ironically, one of the core conclusions of reasoning done with the economic way of thinking is that economic reality is too complex and dynamic to make most such offerings legitimate.