Tag Archives: Debt repayment

The Burden Of Government Debt And James Buchanan’s Corrective, by Daniel J. Boudreaux

The article states some conclusions about debt that don’t require a PhD, or even a Bachelor’s, in economics to reach. From Daniel Boudreaux at aier.org:

Who bears the burden of government indebtedness? Prior to the Keynesian revolution in the mid-20th century, most economists understood that the burden of government (or “public”) debt falls on those citizens who, in the future, must repay the debt. The funds for such repayment can come in the future from higher taxes, from reduced government expenditures on programs other than debt servicing, or from some combination of the two.

But Keynesianism destroyed this consensus. According to what my late Nobel-laureate colleague James Buchanan called the “new orthodoxy” about government debt, all such debt that is owed to fellow citizens – that is, debt that “we owe to ourselves” – is no burden at all upon the generations who must service and repay it.

Three Prongs of the Keynesian Orthodoxy

There are three prongs to this Keynesian orthodoxy. The first prong is rooted in the Keynesian insistence that the main driver of economic activity is the volume of total spending, or what economists call “aggregate demand.” And so if American citizen Smith is taxed an extra $1,000 in order to retire a $1,000 U.S. government bond held by American citizen Jones, there’s no reason to believe that total spending in the American economy will change. While Smith’s spending will fall because his after-tax income falls by $1,000, Jones’s spending will rise upon his receipt of this $1,000. Retiring the debt, therefore, has no effect on economic activity as a whole.

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