vol. 55, no. 4 (April), 1989, pp. 1066-67           


edited by James M. Buchanan, Charles K. Rowley, and Robert D. Tollison
Oxford: Basil Blackwell, 1986, pp. x, 417

The editors of this volume, along with Gordon Tullock, Richard E. Wagner, and nine other economists have addressed themselves to the problem of budgetary deficits. The pattern of co-authorship, which links together many of the twenty-one chapters, reflects the like-mindedness of the contributors.
        As this volume developed from its conception in 1984 to its first printing in 1987, the national debt grew by more than $600,000,000,000. By the time this review appears in print, the debt will have grown by another $300,000,000,000 or so. Yet, according to its preface, Deficits is not intended as a topical book.
        In many respects the book is not topical. It provides no basis for identifying the particular consequences of this year's deficit or of predicting next year's. It does not compare Republicans and Democrats on their relative abilities to deal with the severe fiscal imbalance. Nor does it suggest ways for the fiscal authority to trim the deficit or suggest how the private sector might cope with the fiscal authority's cumulative failures.
        The contributors to this volume are interested in the more cosmic issues. What constellation of incentives and constraints (or lack of constraints) and what ideas or beliefs gave rise to our current state of governmental affairs in which systemic and chronic fiscal irresponsibility is the norm? Buchanan and Tullock [1] provide the basis for identifying the relevant incentives and constraints; Buchanan and Wagner [2] identify the relevant changes in the intellectual climate that have strengthened the incentives and weakened the constraints. The Calculus of Consent in the context of a Democracy in Deficit sets the theme for this timely look at the problem of public indebtedness.
        The book contains few implications for policy in the narrow sense. Again, the focus is on the larger question: How far back do we have to go before we can start all over? In brief, the requirement of fiscal responsibility, which in an earlier era was a matter of political necessity, must be imposed anew; the problem must be addressed at the constitutional level.
        The chapters are grouped into four sections: Perspectives (2 chapters); The Impact of Ideas (8 chapters); The Role of Institutions (8 chapters); and Towards Tomorrow (3 chapters).
        The first section consists of a brief overview by the editors followed by a political and economic history by Gary M. Anderson. Regrettably, the historical reckoning of the debt problem in these early chapters and elsewhere in the book makes use of the Debt/GNP ratio, which according to Anderson, is the most useful way of defining real debt. Although this conventional definition may be useful in a Keynesian analysis for gauging the wealth effect of government debt on spending propensities, it is not particularly illuminating in the context of the issues raised in this book. To illustrate, one of the problems with a high level of debt is that it biases government toward inflationary policies. A falling Debt/GNP ratio, though, can mean either that the government is becoming more responsible in its fiscal affairs or that its fiscal irresponsibility is manifesting itself as inflation. In effect, the book demonstrates that a healthy perspective on the deficit comes from a telling of the story rather than from a reporting of such summary statistics.
        According to John Maynard Keynes, ideas are more powerful than is commonly understood. With one curious exception, the contributors to the second group of chapters accept Keynes's assessment. For advocates of functional finance, debt is not a problem because we owe it to ourselves; for some exponents of New Classicism, debt is not a problem because income earners save to meet future tax obligations. The ideas spawned by Abba Lerner's sophism and, years later, by Robert Barro's over-extension of the Ricardian Equivalence Theorem have had powerful effects both in academia and in politics. Buchanan, Rowley, and others identify the sources and consequences of these ideas about deficit finance. They acknowledge the economic sense in which debt and taxes are equivalent (It was Buchanan who designated this debt-tax relationship as the Ricardian Equivalence Theorem three decades ago); but they emphasize the political sense in which debt and taxes are radically different.
        The curious outlier in this section on the impact of ideas is a short chapter (three pages of text) by Tullock. Following two lengthy and well argued chapters by Rowley on Keynes and his legacy, Tullock proclaims the "general irrelevance of the General Theory" on the basis of a simple empirical test. Tullock compares the periods before and after the Keynesian Revolution using descriptive statistics along with some correlations between deficits and unemployment. The absence or weakness of statistically significant differences between his correlation coefficients cause him to doubt that Keynes's allegedly revolutionary book had any significant impact on the real world.
        Some of the most insightful chapters are found in the section that deals with the role of institutions. Wagner identifies fundamental flaws in conventional justifications of government debt. For instance, public borrowing allows taxpayers to take advantage of the government's good credit rating and low borrowing costs. But considerations of risk and bureaucracy allow Wagner to conclude that the relatively low borrowing rate represents no genuine social gain. W. Mark Crain calls attention to the increasingly important committee system in legislative bodies. Seniority rules as they affect committee leadership give durability to government spending programs and hence to the deficits that help to finance them. Dwight Lee provides a masterful public-choice analysis of the asymmetric dynamics of taxing and spending.
        The final section begins with a provocative chapter by Buchanan on the ethics of default. Does the existence of a default-risk premium on government securities have implications concerning the moral status of claims on future taxpayers? The greater concern in these concluding chapters, however, is about constitutional reform that can help us avoid having to deal with either the ethics or the economics of default. The arguments lead convincingly to the conclusion that a balanced-budget amendment is a necessary though not sufficient condition for the re-establishment of fiscal responsibility in the public sector.

    Roger W. Garrison
    Auburn University

1. Buchanan, James. M. and Gordon Tullock, Calculus of Consent. Ann Arbor: University of Michigan Press, 1962.

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