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George Will and Peter Boettke on James Buchanan: Balanced-budget amendment or debasement?

February 12th, 2013 by Edward Lopez

Columnist George F. Will has been arguing for a balanced budget amendment to the United States Constitution (see his January 9 entry, “Time for a balanced-budget amendment“). At the heart of his argument are three essential points: 1) chronic, growing deficits and the level of accumulated debt are not economically sustainable, so something has to give; 2) tax revenues are not going to give, partly because of the economic reality of slowed growth and partly because of the political reality that no one in Washington wants to raise taxes; therefore 3) spending has to give. The problem with (3) is that cutting individual programs is not an equilibrium strategy for any wise elected official.  Quite the opposite, in fact, as evidenced by the pork projects that were included as part of the deal to avert the fiscal cliff. The only sustainable solution is to “shackle the spenders.”

The latter phrase is the title of Mr. Will’s follow-up column, which engages counter-arguments that a balanced-budget amendment would not work. Fair enough, he says. But:

There is, however, one sufficient argument for a balanced-budget amendment. It is: George Mason University’s James Buchanan.

This Nobel laureate economist, who died last month at 93, pioneered the “public choice” school of analysis, the premise of which is in the title of his 1979 essay “Politics Without Romance.” Public choice theory applies economic analysis — essentially, the study of how incentives influence behavior — to politics.

Concerning the cold logic of power maximization, Buchanan was as unsentimental as Machiavelli, whose “The Prince,” the primer on realism that announced political modernity, appeared exactly half a millennium ago, in 1513. Concerning the naturalness of self-interested behavior — its foundation in unchanging human nature — Buchanan stood in a line of thinkers that includes James Madison, the foremost realist among the cohort of realists we call the Founders.

Six days after Buchanan died, House Republicans provided dismal (and redundant) validation of public choice theory. Rep. Mick Mulvaney (R-S.C.), supported by Majority Leader Eric Cantor and Budget Committee Chairman Paul Ryan, proposed offsetting just $17 billion of the $60 billion aid for victims of Superstorm Sandy and doing so by cutting just 1.63 percent from discretionary government spending. Rep. Hal Rogers (R-Ky.), chairman of the Appropriations Committee, said this would “slash and burn” important programs, and the measure failed because 71 Republicans opposed it.

Similarly, Peter Boettke, at the outset of this interview with Russ Roberts, describes why Buchanan’s premise is necessary to understand government spending in a democratic republic, the current fiscal situation, and how the alternative to spending cuts is the debasement of the currency.

On an intellectual level, the reason why you get drawn to Jim Buchanan is an analytical set of arguments within economics, the most important of which is a demand of behavioral symmetry. The way that I study individuals in the marketplace is the same way that I’m going to study them in the voting booth or in any other walk of life. And traditional economics–textbook economics–had suffered from what Buchanan and Gordon Tullock would refer to as the Roman Emperor problem. A Roman Emperor is asked to judge a singing contest between two contestants, and upon hearing the first gives the award to the second under the assumption that clearly the second couldn’t be any worse than the first. This was the old market-failure/government-correction kind of idea… So we see the market fail and we say government is a [deus ex machina] and can fix it. So, Buchanan, by forcing us to do this behavioral symmetry, said that: look, if people in the marketplace are doing these things because they’re greedy, well, what’s it like when we look at politicians when they are greedy. Rather than looking at people in the marketplace as greedy but people in politics as angels. So, [Buchanan argued] you couldn’t do that. Man was neither sinner nor saint. He’s sort of both, this complex character, and you do that [instead].

Buchanan really cut his professional teeth on the issue of the public debt and the burden of debt, and at the time that he was coming into professional prominence … was at the heyday of the Keynesian revolution… Buchanan, rather than emphasizing the monetary policy side went after the micro foundations of fiscal policy. And he asked the question, in reference to the standard functional finance position, which is that you don’t worry about balancing the budget, but worry about using the budget to balance the economy. And the belief was, from Abba Lerner and all those people that you would balance the budget over the life of the business cycle. So, you would run deficits in times of recession; you would run surpluses in times of plenty; and then you would balance the budget over the life of the business cycle. And Buchanan simply asked the question: What are the electoral incentives that politicians face that would ever make them want to do exactly that? Right? You can see why you want to run deficits during times of recession, but why would you ever want to run the surpluses in times of plenty? And so as a result you end up getting permanent deficit financing.

And so to me, ever since 2008, people ask me: How do I understand what’s going on? I say: Prerequisite reading are Hayek’s Tiger by the Tail and Buchanan’s Democracy in Deficit. And the connection between those two.  And that’s what I personally still think is going to be the undoing or the unwinding of this current situation, is that we’ve done deficits, debt, and debasement. And we haven’t gotten completely to the debasement part of the situation yet.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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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.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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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.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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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.

Madmen, Intellectuals, & Academic Scribblers

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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.

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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.

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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.

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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?

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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.

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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.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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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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