Democracy in Deficit is one
of the early comprehensive attempts to apply the basic principles of public-choice
analysis to macroeconomic theory and policy.
According to Robert D. Tollison in the foreword, "The central purpose of the book was to
examine the simple precepts of Keynesian economics through the lens of public-choice
theory. The basic discovery was that Keynesian economics had a bias toward deficits in
terms of political self-interest."
Democracy in Deficit opened the door for much of the current work on political business
cycles and the incorporation of public-choice considerations into macroeconomic theory.
Even in the area of monetarism, Buchanan's landmark work has greatly influenced the sway
of contemporary theorists away from the nearly universally held belief of Keynesian
theory.
Democracy in Deficit contributes greatly to Buchanan's lifelong fiscal and monetary
rules to guide long-term policy in macroeconomics. The book serves to bolster Buchanan's
central beliefs in the necessity of a balanced-budget amendment to the U.S. Constitution
and in monetary rules rather than central bank discretion.
The book is co-authored with Richard Wagner, a respected colleague of Buchanan, whom
Buchanan recognized as helping to keep the book free of polemics and on target with its
central purpose of applying the elementary theory of public choice.
James M. Buchanan is an eminent economist who won the Alfred Nobel Memorial Prize in
Economic Sciences in 1986 and is considered one of the greatest scholars of liberty in the
twentieth century.
Table of Contents
Foreword xi
Preface xvii
Acknowledgments xxi
I. What Happened?
1. What Hath Keynes Wrought? 3
The Political Economy 4
A Review of the Record 5
The Theory of Public Choice 7
Fiscal and Monetary Reform 8
2. The Old-Time Fiscal
Religion 10
Classical Fiscal Principle 10
Fiscal Practice in Pre-Keynesian Times 13
Balanced Budgets, Debt Burdens, and Fiscal Responsibility 16
Fiscal Principles and Keynesian Economic Theory 21
The Fiscal Constitution 23
3. First, the Academic
Scribblers 25
"Classical Economics," a Construction in Straw? 26
The Birth of Macroeconomics 29
The New Role for the State 31
The Scorn for Budget Balance 32
The New Precepts for Fiscal Policy 33
Budget Deficits, Public Debt, and Money Creation 34
The Dreams of Camelot 37
4. The Spread of the New
Gospel 38
Introduction 38
Passive Imbalance 38
Built-in Flexibility 41
Hypothetical Budget Balance 42
Monetary Policy and Inflation 43
The Rhetoric and the Reality of the Fifties 45
Fiscal Drag 47
The Reluctant Politician 49
Political Keynesianism: The Tax Cut of 1964 50
Economists, Politicians, and the Public 52
Functional Finance and Hypothetical Budget Balance 53
5. Assessing the Damages 56
Introduction 56
The Summary Record 57
Budget Deficits, Monetary Institutions, and Inflation 59
Inflation: Anticipated and Unanticipated 61
Why Worry about Inflation? 62
Inflation, Budget Deficits, and Capital Investment 66
The Bloated Public Sector 71
International Consequences 73
Tragedy, Not Triumph 75
II. What Went Wrong?
6. The Presuppositions of Harvey Road 79
Introduction 79
The Presuppositions of Harvey Road 80
The Economic Environment of "General Theory" 83
Strings Can Be Pulled 85
The Great Phillips Trade-off 87
Post-Keynes, Post-Phillips 90
Reform through National Economic Planning 92
7. Keynesian Economics in
Democratic Politics 95
Introduction 95
Budgetary Management in an Unstable Economy 96
Taxing, Spending, and Political Competition 98
Unbalanced Budgets, Democratic Politics, and Keynesian Biases 101
Deficit Finance and Public-Sector Bias 106
8. Money-Financed Deficits
and Political Democracy 110
Introduction 110
Budget Deficits Financed by Money Creation 111
Benevolent and Independent Monetary Authority 114
The Political Environment of Monetary Policy 117
The American Political Economy, 1976 and Beyond 125
9. Institutional Constraints
and Political Choice 129
Introduction 129
The Public Economy and the Private 130
Fiscal Perception and Tax Institutions 131
Debt-Financed Budget Deficits 138
Money-Financed Budget Deficits 147
Institutions Matter 149
III. What Can Be Done?
10. Alternative Budgetary Rules 153
Budget Balance over the Cycle 154
Built-in Flexibility 155
Budget Balance at Full Employment 157
The Budget Reform Act of 1974 162
Short-Term Politics for Long-Term Objectives 164
11. What about Full
Employment? 167
Introduction 167
Current Unemployment and the Quandary of Policy 167
The Keynesian Theory of Employment 170
The Inflation-Unemployment Trade-o 172
The Inflation-Unemployment Spiral 174
Biting the Bullet 177
So, What about Full Employment? 178
12. A Return to Fiscal
Principle 180
The Thrill Is Gone 180
The Case for Constitutional Norms 182
The Case for Budget Balance 183
Fiscal Decisions under Budget Balance 184
Tax Rates and Spending Rates as Residual Budget Adjustors 185
A Specific Proposal 187
Debt Retirement and Budget Surplus 189
In Summation 190
Author Index 195
Subject Index 197
194 pages
