Front Page Titles (by Subject) V.: The Public-Debt Trap - The Collected Works of James M. Buchanan, Vol. 10 (The Reason of Rules: Constitutional Political Economy)
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V.: The Public-Debt Trap - Geoffrey Brennan, The Collected Works of James M. Buchanan, Vol. 10 (The Reason of Rules: Constitutional Political Economy) 
The Collected Works of James M. Buchanan, Vol. 10 (The Reason of Rules: Constitutional Political Economy) Foreword by Robert D. Tollison (Indianapolis: Liberty Fund, 1999).
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The Public-Debt Trap
Our discussion of the public-debt trap will be brief, since this trap is in most respects identical with the two macroeconomic applications of the public-private discount rate disparity already examined. In analyzing the high-tax trap, we neglected public debt as a source of revenues. The introduction of the public-borrowing option clearly expands the possibility frontier of the participant in political choice.
Even if the effects of public-debt issue are recognized by all members of the polity (which seems a highly questionable assumption, although it is not vital to our argument here), the shortened time horizon in politics will make this financing option preferable to taxation over some initial ranges of outlay unless there are constitutional or moral prohibitions on debt issue. By borrowing the funds with which to finance currently enjoyed “goods,” the participant is postponing the day of payment. Governments can borrow at or below the market-determined rate of interest. But the discount rate that informs politics is higher than the market rate of interest, for reasons already discussed. Hence, the short-term benefits expected from outlays will exceed the short-term costs computed as the present values of anticipated future tax payments discounted at market rates. This calculus remains valid even for the person who realizes that in the long run, a debt-free fiscal structure is preferable to a debt-ridden structure. By forgoing the benefits of debt-financed current spending, however, the person is not able to insure against the long-term tax liability that debt service and amortization imply. A political coalition in periods subsequent to that in which current fiscal choices must be made may wholly undo any effects of current-period fiscal prudence. There is simply no rational basis for an individual to support, to “vote for,” fiscal prudence in the operation of ordinary democratic politics. Public debt will tend to be overextended relative to any plausible long-term arguments for the use of this fiscal instrument. The political equilibrium between debt and tax finance will be distorted in favor of debt, and tax rates will be excessive for the reasons already analyzed, at least by the criterion of the long-term interests of the members of the community.
Precisely the same logic applies, of course, to the possible repayment or retirement of an existing public debt. The participant in ordinary politics may recognize that debt retirement now will benefit the whole community in the long run, but given nonfiscally constrained democratic decision processes, there is no means of guaranteeing that debt retirement now will, indeed, have the long-term effects that are preferred.
As in the two previous examples, incentives that will induce the individual, as a participant in politics, to behave in accordance with his (and the community’s) long-term interest can be provided only through some limitation on the powers of political coalitions (governments) to offset or destroy the effects of long-term “investmentlike” choices that might be made currently.7
[7. ]For analysis of the debt dilemma along lines that are in many respects similar to those presented here, see James M. Buchanan, “Debt, Demos, and the Welfare State” (paper presented at a conference on the welfare state, Civitas, Gesellschaft zur Forderung von Wissenschaft und Kunst, Munich, West Germany, October 1983).