Political Entrepreneurs

The Economic Engine of Political Change

Buchanan on the Economics and Morality of Deficits: It’s all Public Choice Theory

June 11th, 2014 by Edward Lopez

Here is James M. Buchanan (1919-2013) writing in “The Moral Dimension of Debt Financing,” Economic Inquiry, January 1985.

Economists have almost totally neglected moral or ethical elements of the behavior that has generated the observed modern regime of continuing and accelerating government budget deficits. To the extent that moral principles affect choice constraints, such neglect is inexcusable. It is incumbent on us, as economic analysts, to understand how morals impinge upon choice, and especially how an erosion of moral precepts can modify the established functioning of economic and political institutions. A positive, empirical theory of the operations of moral rules is in order even if we want to leave the preaching to the moralists.

[snip]

I shall argue that the explosive increase in debt or deficit financing of public consumption outlays can be explained, at least in part, by an erosion of previously-existing moral constraints. The political decision makers did not “discover” a new technology of debt financing midway through this century. Their rational self-interest has always dictated resort to nontax sources of public revenues. What happened in this century was that debt financing ceased to be immoral.

 The piece was published 21 months before Buchanan won the Nobel Prize. As we write in Chapter 4 of Madmen, Buchanan was interviewed by the Washington Post after the award, which among other topics discussed the essence of public choice theory.
When Buchanan was asked by his local paper, The Washington Post, to explain “exactly what public choice is,” Buchanan said public choice is studying politics with the tools that economists use to study markets. Public choice treats voting, lobbying, regulating, and all other political decisions as made by self-interested individual people, working within agreed-upon rules. The Post’s reporter was nonplussed. Well, isn’t that just common sense, the paper asked? And why would the Swedes award common sense with a Nobel Prize? Perhaps recognizing a language barrier, Buchanan agreed, saying it probably wasn’t much more than common sense. But he reminded his interviewer that most economists didn’t see it that way.
Continuing the interview, in a section that did not survive Madmen’s editorial process, the Post interviewer continued:
Q: Could you give an example of the application of public choice, how it’s used.
A: The single best example, and actually a very simple example: It gives us an understanding and insight into why we have these huge budget deficits. Elected politicians enjoy going back to their constituents in their districts or their states and saying, “I voted to bring this big program that will benefit you here, this harbor, or we cleaned out this river or this defense plant or whatever.” So they enjoy voting on spending programs. They don’t enjoy going back to voters and saying, “Look, I have to raise your taxes.” There’s a natural proclivity for them to create deficits unless they are constrained by some moral rule or some constitutional rule. So it’s easy to use public choice to explain why we have these huge deficits.
Q: Why do you think it took so long for economists to accept this way of thinking?
A: This is a little bit the way ideas develop in history. Traditionally there was a kind of a moral constraint that dictated that we should only have deficits in major wars or depressions. And we should always balance the budgets except in those conditions. And this was a constraint sufficient to impose discipline on our politicians. But then we got the Keynesian theory of economics coming up. By the 1940s all economists were convinced that the Keynesian theory of policy should be applied. That theory of policy said, “Look, use the budget to balance the economy, not to try to balance the budget.” So any time you have a depression you run a budget deficit and that’s a means of stimulating spending. And in the idealized Keynesian policy, when you have inflation or a boom you use a surplus, so over the cycle you balance the budget. That policy simply neglected this sort of political climate in which these decisions need to be made, and failed to recognize that ordinary politicians were just like the rest of us, trying to get reelected. They cannot go back this year to their districts and say, “Look, I voted for more taxes and less spending.” So the political structure of democracy prevented the idealized Keynesian policy from working, because politicians will always seek to create deficits when they have any excuse, and they’ll never create surpluses. So you have this permanent deficit regime because of this Keynes theory of economiic policy. And as a result, from the 1960s on we only had a budget in balance for one year. And of course that’s where the Gramm-Rudman-Hollings legislation came in. That reflected the recognition, even by the Congress itself, that they needed to have some prior constraint because the structure of their decision process was such that they’re going to run permanent deficits, structural deficits. And they tried to fix that up in the legislative process. I think a constitutional restraint would be much more likely to be effective. But the Gramm-Rudman-Hollings legislation is having an impact.
Source: Jane Seaberry, “Nobel Winner Sees Economics as Common Sense; Buchanan Says His Public Choice Helps Explain Politics,” Washington Post, October 19, 1986, C-1
From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.189, ch.7)

The most successful entrepreneurs know what they do well, they know the market and the opportunities within it, and they choose those activities that create the most value. This is true in economic as well as political markets.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.178, ch.7)

[W]hen the right elements come together at the right time and place and overwhelm the status quo, it is because special people make it happen. We call them political entrepreneurs.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.176. ch.7)

While we started this book with Danny Biasone saving basketball, we end it with Norman Borlaug saving a billion lives. These stories are not that different. Both faced vested interests, which were reinforced by popular beliefs that things should be a certain way—that is, until a better idea came along.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.174, ch.6)

Because there was a general belief that homeownership was a good thing, politicians found the public with open arms.... Everybody was winning—except Alfred Marshall, whose supply and demand curves were difficult to see through the haze of excitement at the time, and except Friedrich Hayek, whose competition as a discovery procedure was befuddled... In short, once politicians started getting credit for homeownership rates, the housing market was doomed.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.166, ch.6)

Everyone responded rationally to the incentives before them. In short, the rules that guided homeownership changed over time, which in turn changed the incentives of these actors. And bad things happened.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.153, ch.6)

They understood the economics. The ideas had already won in ... the regulatory agency itself. All that remained to be overcome were some vested interests and a handful of madmen in authority.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.146, ch.6)

If the idea for auctions of spectrum use rights had been part of the public debate since at least 1959, why didn’t the relevant institutions change sooner? What interests stood in the way?

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.121, ch.5)

When an academic scribbler comes up with a new idea, it has to resonate well with widely shared beliefs, which in turn must overcome the vested interests at the table. Many forces come together to explain political change, even though it may seem like coincidence of time and place.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.120, ch.5)

It’s the rules of the political game that deserve our focus, not politicians’ personalities or party affiliations.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.119, ch.5)

In short, ideas are a type of higher-order capital in society. Like a society that is poor in capital and therefore produces little consumer value, a society that is poor in ideas and institutions will have bad incentives and therefore few of the desirable outcomes that people want.

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