ABSTRACT
Following a discussion in the previous chapter of justice’s meaning and relevance to the issue of public indebtedness, twentieth-century fiscal trends and economic thought on public debt are reviewed. The “fiscal revolution” usually attributed to John Maynard Keynes, upon closer inspection, took important steps prior to the publication of his General Theory and continued with diminished support after Keynesianism suffered theoretical setbacks in the midst of simultaneous high unemployment and high inflation in the 1970s. The dominance of Keynesianism, it will be argued, may be due more to the compatibility of its assumptions with aims of the modern administrative state than to the empirical relevance of its theory. Keynesianism offered a theoretical rationale for debt issuance by governments inclined to borrow. Robert J. Barro constitutes the second major strand of thought on public debt by contemporizing the Ricardian equivalence theorem, which postulates that public debt issuance today is in essence the same as a tax tomorrow. Mathematically irrefutable, the theorem has fairly severe empirical limitations. From the standpoint of fiscal conservatism, Barro can be seen as arguing that the bill will come due, that debt must be paid. In the context of political reality where it is easier to issue debt than raise taxes, the empirical effect of Barro is Keynesian: a greater proclivity to issue debt. A third strand of thought on debt is represented by James Buchanan and draws on classical (not as in Greek but as in economic thought of the eighteenth and nineteenth centuries) themes to attack the central assumptions of Keynesianism. Taking a collective view, Keynesians like Abba Lerner argue that debt does not disadvantage future generations because “we owe it to ourselves,” that is, one part of society is merely repaying another part of society. Buchanan argues convincingly that this may not be the case. Public debt may do good if used prudently but also may result in a transfer of wealth from the future to the present.
