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• Associate Editors
• Editorial
• Bibliographical Essay: Economics and Ideology: Aspects of the Post-ricardian Literature
• I: Political Economy
• The Classical Model of Political Economy
• Modernization, Ideology, and Economic Freedom
• Individualism Vs. Collectivism?
• The Industrial Revolution and Literacy
• Parliamentary Enclosure and Uprooted Labor
• Smith's Critique of Monopoly
• Ricardo and the “dual Development”
• Ricardo On Money
• Inflation and Political Crisis: Germany
• Inflation and Unemployment
• Government and Inflation: the Mccracken Report
• II: Concepts of Liberty
• Liberty and Its Components
• Is the Right to Freedom Vacuuous?
• Liberty, Slavery, and Utilitarianism
• Individualism, Freedom, and Society
• Liberty and Habeas Corpus
• Should Britain Have a Bill of Rights?
• Locke, Women, and Freedom
• Locke, Women, Freedom, and Individualism
• Locke, Property, and Individualism
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• Liberty and Mental Illness
• Sismondi and Liberty
• Mill: On Liberty
• Mill, Freedom, and Happiness
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• Freedom In Kant, Hegel, and Marx
• Marx, Freedom, and Property
• Neoconservatives, Liberty, and Equality
• Freedom: the Politics of Justice and Existence
• Liberty and the American Revolution
• American Libertarians
• III: Economics and Public Policy
• How Economics Influences Political Theory
• Why Democracies Choose Deficits
• Inflation and the Welfare State
• Monetarism and the Depression
• Asian Monetary History: Gold & Silver
• Specie Money Vs. Antibullionists
• Inflation Effects On Capital
• Consumption of Public Health Services
• Factory Regulation and Vested Interests
• Poverty Programs and Government
• The Costs of Regulating Market Information
• Rent Regulation
• Engels On Economics
• IV: Social Analysis
• The Depoliticization of Society
• Is Philosophy Politically Subversive?
• Plato's Republic As a Political Dystopia
• Cicero and Modern Political Philosophy
• The Roman Jurist Gaius and Social Thought
• The Myth of Social Hierarchy
• Contract and Political Thought
• Private Vs. Public: the Domain of Freedom
• Montaigne and the Value of Tolerance
• Commerce, Utility, Character, and Republicanism
• Quintin Skinner and Western Political Thought
• Public Choice
• Editorial Board
• Contents of Vol. 33 No. 2
• Contents of Vol. 33 No. 3

Why Democracies Choose Deficits

Mark W. Crain and Robert B. Ekelund, Jr.

• Virginia Polytechnic Institute and State University; Auburn University and Texas A&M University

“Deficits and Democracy.” Southern Economic Journal 44 (April 1978): 813–827.

Democracies have tended to resort to budget deficits to finance expenditures. We can use a model of political competition which explains deficit financing in democracies by recognizing that institutional arrangements and corresponding assignments of property rights significantly influence individual choice.

We can view politicians as political suppliers of deficits in a monopoly situation: politicians compete for the right to supply a monopoly product (governing) for a limited time which is renewable through reelection. This view implies that political parties will strive to give the voters what they want in order to get elected; hence voters seem in some sense to “want” deficits rather than taxes to finance expenditures. The “rational expectations” literature predicts that (since deficits imply future tax liabilities) rational voters will treat deficits and taxes as equivalent claims and exhibit no preference between the two forms of finance. However, even perfectly rational and foresightful voters will prefer deficits.

One reason politicians can get away with deficit financing without voter preference is the incentive structure. Voters may be conceived of as owners of public goods and politicians as “managers.” Then the politician-managers would have no personal liability for financial mismanagement, and would thus reduce the capital value of the public stock beyond their own pro rata share of future tax liabilities. Deficits are then seen as the least costly means of financing expenditures. Voters, on the other hand, would demand expenditure because they see the increased cost to any one voter as negligible while the potential benefit can be great.

Two factors explain why voters will prefer deficit financing in a democracy. The first is that individuals have positive discount rates (positive time preference), and the second is that they can shift some of the costs to the future. That is, voters desire deficits because they do not rate the utility of next generation's consumption as equal to their own. They can, in fact, shift the burden of the debt to the future by taxing human capital rather than non-human capital. If non-human capital alone were taxed, a budget deficit would place a liability on future income streams of capital goods. This would reduce the present value of the good sufficiently to offset increased future taxes. The present owner would bear the burden of the debt. If human capital is taxed, one cannot capitalize his own present value indefinitely into the future, so part of the future tax will be paid out of the human capital of the next generation. One test of this hypothesis would be if states which rely more on income taxes than property taxes have greater deficits. Testing has shown this to be the case. Governments which routinely tax human capital to finance at least part of their budgets are more likely to run deficits.