by Donald J. Boudreaux
The American Institute for Economic Research
My late Nobel-laureate colleague James Buchanan made many important contributions. Among the most significant is his proof, first offered in 1958, that Adam Smith and other classical economists were correct to argue that government projects that are funded with debt are ultimately paid for by the future citizens whose taxes must be raised (or whose government benefits must be reduced) to get the funds necessary for repayment. (Randy Holcombe and I explain further here.) With deficit financing, today’s citizens-taxpayers impose costs on tomorrow’s citizens-taxpayers.
It’s possible, of course, that today’s citizens-taxpayers can use deficit financing also to bestow benefits on tomorrow’s citizens-taxpayers. If, for example, government borrows money today to build a hydroelectric dam that will operate successfully for decades, tomorrow’s citizens-taxpayers get not only the liability of having to pay for this dam but also an asset in the form of the dam’s capacity to generate electricity.