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By Richard M. Salsman, Assistant Professor, Duke University

Program in Philosophy, Politics, and Economics (PPE)


Chapter for book edited by John D. Merryfield and Barry W. Poulson

Submitted: 2018.12.15 ● **** Count: 6000 (Max)


The golden rule of public finance (GRPF) holds that if governments borrow, they should do so primarily for productive, not consumptive purposes, to invest and create capital goods that yield a return and foster private sector productivity, not to fund ordinary expenses or redistributive transfers that undermine prosperity, curb growth in tax revenues, and jeopardize debt servicing.  Public debt is justifiable, serviceable, and sustainable if it is issued mainly to fund durable, income-producing assets, not if its proceeds fund ephemeral or wasteful consumption; it is warranted only to the extent it helps create wealth over future decades, not to the extent it redistributes or destroys wealth in the present.[1]

As a fiscal norm, the GRPF has faded over the past century or so, both in theory and practice. As an informal institution, it still has its defenders, but its defense is still a minority view in public finance scholarship.[2] The GRPF is ignored and debt finance is barely mentioned in an 800-page, top-selling public finance textbook.[3] Once a key aspect of nineteenth-century Victorian-Gladstonian principles of public finance,[4] the GRPF was abandoned piecemeal beginning in the 1930s, amid the financial turmoil and fiscal profligacy of the Great Depression. As a reputable rule, the GRPF faded further in the decades after the last vestiges of the international gold standard were jettisoned in the early 1970s. More recently, the GRPF was buried under the avalanche of public debt and monetization that accompanied and followed the 2008 crisis and Great Recession. Faint calls for a diluted GRPF now come mainly from those who fear that “austerity” budgets and the recent diminution of “fiscal space” will deter public investment and prevent a full resort to deficit spending to fight future recessions.

The erosion of long-held “golden” norms in fiscal and monetary affairs alike is neither random nor inexplicable; it reflects a deeper erosion in the golden rule of morality, which holds that as individuals we should treat others as we wish others to treat us in turn. This reciprocal ethical norm undergirds fair dealing, non-discrimination, and equal protection of the law; its erosion, in contrast, permits unequal, unjust treatment, which tends to become codified in law, politics, policymaking, and public finance.

Foundations of the GRPF

Two main justifications are typically offered for a GRPF. The first is primarily economic and echoes the  corporate-finance principle that debt is more likely to be fully serviced (via payments of principal and interest) if its proceeds are deployed to create future income streams from which debt service flows; loan proceeds should finance capital assets that yield a return (or make the economy more productive than it might be otherwise), not consumable goods or services that yield little or nothing.  Even in household finance, debts incurred to help purchase homes, autos, appliances, diplomas, and vacations are not serviceable without adequate income earned from productive activity. Nothing inherent in public finance exempts governments from the necessity of abiding by these principles, and failing to so abide, nothing can prevent them from suffering fiscal, monetary, and economic failure.

The second justification for a GRPF is primarily moral and holds that it is only fair if citizens pay for what they get and use; current generations should not have to shoulder (by taxes) the full cost of creating durable public goods today, which will mostly benefit future generations; the latter should pay most of the current cost via future taxes, to help service the bulk of previously incurred public debt.[5] Nor should future generations be burdened by debts passed on to them by ancestors, unaccompanied by sufficiently productive and remunerative assets to help service the debt.[6] This justice-oriented “benefits principle” is as applicable to debt-financed public spending as it is to tax-financed outlays. Its counterpart, which has become dominant in recent decades, is the “ability-to-pay” principle, which severs the link between cost (payment) and benefit (use) and requires, in Marxian terms, that the state secure funds “from each according to his ability” and transfer them “to each according to his need.”[7]

The GRPF was never a formal, codified rule or law, nor a precisely-stipulated doctrine etched in the constitution of any nation.[8] Some governments in recent decades have adopted deficit limits, debt caps, and spending “brakes,” both constitutionally and statutorily, but during recessions and financial crises these legal boundaries have been readily breached, without much official concern to effect a remedy.[9] The best example is Europe’s Stability and Growth Pact (SGP), in place since 1998.[10]  The SGP has never embodied a GRPF and the GRPF itself has never been constitutionally-mandated nor strictly followed by any government. Yet for at least a century prior to the 1930s, before the spread of Keynesian notions, the GRPF was a widely-recognized and broadly-practiced informal fiscal norm.[11]

As the GRSP has been abandoned, no widely-accepted alternative fiscal norm has replaced it. More than a half century ago, Buchanan (1967) discerned (and critiqued) what he called “fiscal nihilism,” or the rejection of any and all rules per se.[12] Yet policy today appears even less rule-bound. Yet Keynesian premises and doctrines, widely discredited in the 1970s, have been revived over the past decade. In place of a fading GRPF, a nearly-opposite norm presumes that public consumption is acceptable – indeed indispensable, reflecting the Keynesian desire to ensure adequate aggregate demand – and should be financed not by higher taxes (which might reduce aggregate demand) but by the issuance of vast new sums of public debt, even if it is not likely ever to be fully serviced.[13] An alternative approach, using the notion of Ricardian “equivalence,” says there is no difference between tax finance and debt finance, hence nothing wrong with borrowing to consume.[14] As for unsustainable public debt and default risk, some argue that public bondholders’ astute and heightened expectation of default provides ethical cover for public officials to default deliberately.[15] This could become the new norm in future decades: consume by borrowing, then default on principle.  A recent work, reversing causality, insists that defaults on public debt can rectify harm inflicted by private creditors on public debtors, which presumes that over-indebtedness reflects predatory lending, not predatory borrowing.[16]

Erosion of the GRPF

Viewed accurately (and metaphorically), the GRPF is but a “finger in the dike” that must fail to deter floods of fiscal profligacy to the extent they originate in limitless democratic whim. The problem is more electoral than economic. An eroded GRPF is the effect, not the cause, of public debt deluge.

Over the past century, four fiscal phenomena detrimental to the GRPF (and prosperity) have become the norm in the U.S. and major economies. First, public spending has increased both in real terms and relative to GDP.  Second, the composition of public outlays has shifted from traditional capital spending (infrastructure) to spending on consumption (intangibles, including income transfers, health care, higher education, and various schemes of “social insurance”). Third, to fund increasing public consumption, governments have come to rely more on debt finance (and unfunded “entitlement” promises) and less on tax finance; in the latter case, some states have become reliant on a narrow subset of (richer) taxpayers, versus less-taxed or untaxed citizens. Finally, public obligations have increased not only in absolute terms but relative to GDP (i.e., public leverage has increased).

Focusing on the U.S., Tables One, Two and Three illustrate material shifts in the pattern of U.S. public finance in recent decades. Federal outlays averaged 17% of GDP over the past century compared to just 3% over the prior century and have averaged 20% of GDP during the past fifty years compared to 14% during the prior fifty years (Table One). Deficit-spending outside of wartime was rare in the century prior to 1918 but the budget differential has averaged -3% of GDP since then; the differential has averaged -5% of GDP over the past decade, causing a rise in federal debt as a share of GDP, to an average of 100% over the past decade compared to 62% over the prior decade (Table One). During these two decades the spending share of GDP has risen, while the revenue share has declined.

As for the composition of federal spending, U.S. public investment has diminished over the past half-century relative to increases in social spending and transfers. U.S. budget analysts conveniently distinguish spending on “Physical Resources” versus “Human Resources,” each of which excludes defense spending.[17] Spending on physical resources has decreased relative to all federal outlays, from 8.3% in 1962 to just 3.3% in 2018, while outlays on human resources have increased from 29.6% of the total in 1962 to 72.8% in 2018 (Table Two). To permit this shift, military expenditures have dropped from 49.0% of the budget in 1962 to just 15.4% in 2018. Interest expense now comprises a budget share (7.4%) that’s more than double the share for investment (3.3%) and more than it did in 1962 (6.4%), albeit than it did in 1990 (14.7%) due not to lower debt levels but lower interest rates.[18]

Real growth in U.S. federal spending on “major public physical capital, research and development, and education and training” (including defense spending) has decelerated from 2.5% per annum between 1962 and 1990 to just 1.0% per annum between 1990 and 2018.[19]  As a portion of total federal spending, such outlays have declined steadily from 32.3% in 1962 to 18.2% in 1990 and 12% in 2018. Growth in non-defense investment spending has decelerated more so, from 3.7% per annum (1962-1990) to just 1.8% per annum (1990-2018) and now comprises just 7.3% of all federal spending, down steadily from 9.0% in 1962 and 7.7% in 1990. Non-defense federal investment spending has never been a large share of total output, but it is now just 1.5% of GDP, having averaged 3.0% of GDP from 1962 to 1990 and 1.8% of GDP from 1991 to 2017. In contrast, gross private domestic investment has averaged 18% of GDP since 1962 (in a range of 13-21%)[20] and its growth has not decelerated: in real terms it has been steady, at 4% per annum from 1962 to 1990 as well as from 1990 to 2018. Whereas the private sector invested $3.4 trillion in 2017, the federal government invested less than a tenth of that ($278 billion), albeit supplemented by another $364 billion spent by state and local governments.[21]

Even if all public investment was value-adding and helped boost the productivity of the private-sector economy, it’s undeniable that it has diminished in recent decades, not because of some stricter commitments to budget balance and fiscal “austerity” but to and ideological and budgetary commitment to more consumption-oriented social spending and transfers. This shift in spending priorities may explain, at least partly, the deceleration in private sector productivity growth since the 1970s. Growth in real output per hour worked in the U.S. business sector decelerated from a compounded rate of 3.3% per annum between 1947 and 1970 to just 1.9% per annum between 1970 and 2018.[22] The shifting composition of federal spending from investment to consumption may curb productivity gains even more if we drop the premise that all public investment adds value, or if it adds less value than might be added by private-sector spending, or if, at worst, some of it subtracts value.

Even if the GRPF had been strictly followed in recent decades, with the result that far less public debt was incurred (it being ineligible as a means of funding purely social-consumptive outlays), it may not have helped the economy maintain (let alone increase) its previously high rate of productivity growth. The GRPF can guard against public borrowing to fund consumption but cannot preclude a shift towards such spending away from investment spending.  Nor can the GRPF ensure that public investment will be productive, or more so than private investment. The GRPF might preserve productivity gains because, to the extent it requires consumption spending to be tax-financed, it might encourage taxpayer resistance to such spending; but likewise, ideological and electoral support for social spending motivates politicians to fund it by less-painful, less-visible ways (by debt-finance).

Appeals to the GRPF by a reclassification of public spending

A further erosion of the GRPF is cause today by attempts to rationalize and justify all types of government spending. Beyond traditional tangible (physical) public capital (infrastructure), there has always been semi-intangible public capital (services), including national defense, the courts, and law enforcement. At root, and at its best, government provides justice; the constitutionally-limited, fiscally-responsibly state does the job best. Acolytes of social justice, in contrast, insist that governments do much more, particularly by redistributing income and wealth. Those who acknowledge the validity of the GRPF but welcome its abandonment, hoping always to preserve and extend the size and scope of government, worry that its defenders might still hold sway. Many studies reveal that “social spending” and transfers degrade economic productivity and living standards instead of improving them.[23] Thus attempts are made to re-classify public consumption as “public investment.” Politicians promise more spending not only for tangible infrastructure (roads, bridges, tunnels, ports, power grids) but also for “investment” in “our children,” in education, health care, retirement security, the ecosystem, and a vast myriad of other (intangible) purposes. Although the reclassification appeals to genuine proponents of investment, it works mainly to preserve and expand public consumption at the expense of investment.

The GRPF is a dead letter whether it is rejected fallaciously as a barbaric relic of some bygone era of fastidious fiscal rectitude or instead it is endorsed erroneously on the dubious claim that most public spending today is akin to capital spending and thus can be predominantly and safely debt financed.

Politicians are not alone in re-branding consumption as investment. In public economics, all types of public spending are classified as “capital investment,” including outlays on public schools (to create “human capital”), on social insurance (to create “safety nets”), on food stamps or the unemployed (to provide “countercyclical” measures that mitigate recessions), on the prevention of “climate change” (to preserve “natural” resources as assets), on bailouts of “systemically important” banks and firms (to prevent financial-economic meltdowns), and on sports, recreation, entertainment and the arts (to provide emotional fuel and local pride).  Even spending on war, an act of destruction, can be called “investment” if it preserves a nation’s autonomy, liberty, or security (the preconditions of prosperity). These programs also have an operational-administrative aspect, without which they could not be conducted; as such, some argue that we may also include in “capital spending” the programs’ operating expenses. If so, nearly all public spending today can be considered capital spending and as such can be legitimately funded by public debt.  By this unorthodox approach, the main point is not that an objective, legitimate rule (like the GRPF) has been breached; it is that classifications of public spending are so subjective that most outlays (and borrowings) can be said to abide by the GRPF.

Weak-form defenses of the GRPF today seek less to ensure that public debt is used only to fund genuine capital investment and more to ensure that at least some material budget allocation remains for such investment, especially when a large and growing portion of public outlays are now consumptive and arguably “crowd out” both public and private investment. The worry is greater, for some, in the face of post-2008 plans for “fiscal austerity.” Forced to choose, elected officials more readily curtail capital outlays than consumptive-transfer outlays. Thus, for many public economists today the point of a GRPF is to make sure public investment is not prevented amid fiscal stringency; a GRPF can “safeguard” public investment, which, it is assumed, ensures recovery from economic recessions and embodies “growth-friendly properties” and “intergenerational equity.” According to Lledo et al (2018):

Golden rules impose a ceiling on the overall deficit net of capital expenditure (also called current balance). With a zero ceiling, borrowing is permitted to finance investment only; current spending must be covered by revenues. Golden rules are designed to promote and protect capital expenditure, which is seen as more pro-growth and politically easier to cut than other types of spending. These rules are also more consistent with intergenerational equity than other budget balance rules, since they shift the burden of financing public investment projects from current to future generations, which will be the main beneficiaries of such projects. The growth-friendly properties of golden rules should not be overstated.[24]

Similarly, Truger (2015) worries that widening budget deficits in the Euro area will face “fiscal constraints” that will “drive member states into austerity,” make things worse. However, The golden rule of public investment . . . is widely accepted in traditional public finance and would allow financing net public investment by government deficits thus promoting intergenerational fairness as well as economic growth. A pragmatic version focusing on net public investment as defined in the national accounts minus military expenditures plus investment grants for the private sector could quickly be implemented. Net public investment should be deducted from the relevant deficit measures of the Stability and Growth Pact and the fiscal compact. Over time it could be technically and statistically refined and potentially include other – more intangible – types of investment like education expenditures . . . The golden rule would have to be complemented by expansionary fiscal policy to provide the urgently needed boost to the European economy in the short term.[25]

Much analysis of the GRPF today presumes that public capital investment is productive, in the sense of being self-sustaining (through fees), value-adding, or helpful (even necessary) to enhancing private sector productivity. But the presumption is questionable when a capital project is defended primarily as a job creator (which is not akin to “wealth creator,” given featherbedding and other corruptions) or as a spending “multiplier.” The premise is also questionable to the extent public capital analysis underestimates opportunity costs, or the foregone (private) use of resources used publicly. Analysis is merely partial which calculates only the potential return on investment of some public outlay or the productivity of some existing public capital; the analysis is complete only when it is proven that it is more productive, over the long run, than if the private sector were to undertake it. Even if some infrastructure is deemed valuable, the private sector may be its superior, more profitable builder and operator. Private options are elided if infrastructure is presumed to be a public monopoly.[26] Not only might public infrastructure be productively inferior to similar-purpose private infrastructure, but if it’s badly-built, under-built, or under-maintained – yet still monopolized – it can impede growth. In public schools, evidence exists that potential human capital is more wasted than it is developed

Even if it is valid to assume that public infrastructure is as productive (or more so) than similar-purpose private infrastructure, two potential problems remain: an insufficient amount of it may be built, and large public debts nonetheless may be incurred to fund not investment but consumption.[27] Public capital, though productive, may be deficient in its totality and capacity to repay public debt.

The gold standard in money

BBAs and why they fail;

In U.S. first one proposed was 1936[28]

The GRPF is but one of a few very important public finance rules that have been abandoned over the past century. Similarly (and not coincidentally) monetary rules have been abandoned, the most notable being the international gold standard, which was first diluted in 1930s, then jettisoned entirely in 1971. A close link exists between the twin abandonment of fiscal and monetary rules. Central banks now have near-complete discretion to conduct monetary policy in any manner they choose, and in recent years they have elected to monetize vast sums of newly-issued debt; in doing so they have abandoned any remaining pretense of political-fiscal “independence.” Relevant also is a pronounced shift away from constitutionally-limited government to relatively-unconstrained democracy. Chronic deficit spending results when politicians win office by accommodating a popular preference for public profligacy, based on the desire to obtain public benefits (spending) in excess of public burdens (taxes).  This desire cannot be satisfied politically if officials are at all constrained by fiscal or monetary rules.

The search for fiscal rules amid widespread fiscal profligacy is akin to the search for fixed monetary rules amid arbitrary monetary policymaking. Central banking and the state control of money facilitate deficit sending, provide (through monetization) a demand for cascading public debt, artificially lower borrowing costs, and forestall explicit defaults. It’s no coincidence that the rule-based gold-exchange standard and the GRPF were abandoned together, nor that debt finance has so readily displaced tax finance in recent decades amid unprecedented peacetime debt accumulation and monetization by central banks. The trend in favor of “central bank independence” in the 1990s has since been reversed, especially (and aggressively) so in the decade since the crisis of 2008-2010.

Once the golden monetary handcuffs were removed from central bankers in the early 1970s, so was the incentive for public financial officials – including at finance ministries – to care much about fiscal rectitude. We now live in an age of near-unlimited policy discretion in both fiscal and monetary realms. Whether one considers fiscal or monetary affairs, one discovers a reign of democratic rulers who rule without rules – precisely the arbitrary, capricious form of public (and monarchical) governance that constitutional liberals in the eighteenth and nineteenth centuries fought to restrain.

The golden rule in morality

The erosion of golden norms in both fiscal and monetary matters plausibly reflects a deeper erosion in the golden rule of morality, which holds that ethics should be sufficiently objective and consistent as to be universally applicable and practicable; if so, one should treat others as one wishes to be treated by them in turn. This norm of reciprocal respect undergirds fair dealing interpersonally, non-discrimination socially, and equal treatment before the law (and politically). But the golden rule too has eroded in recent decades and its counterpart countenances unequal, discriminatory, and unjust social relations, which is codified in the law, essentialized in public policy, and embodied in public finance. An example of the latter is the graduated income tax, which disproportionately punishes the rich for the unearned benefit of the non-rich; another example is the policy of “financial repression,” which artificially reduces the real cost of public debt at the expense of its holders and private debt issuers; yet another example is the corrupt means by which current-generation officials and voters deploy unsound public finance schemes to maximize consumption, minimize taxation, free-ride, and transfer unserviceable debts and insufficiently-productive public assets to voiceless future generations.

The GRPF in fiscal affairs and the gold standard in monetary affairs have not been lost to the world because they were “inefficient” or impractical; if an ever-rising living standard is one’s wish, few public institutions beyond sound money and sound finance can help make it come true. History amply illustrates the point.  The Industrial and Financial Revolutions, which fueled and fostered economic prosperity beginning in the eighteenth century, were made possible by credible, rational, and sustainable systems of sound money and sound finance, especially as practiced in the U.K. and the U.S.A. The GRPF and the gold standard have been largely lost to the contemporary world not for economic reasons but for moral-legal-political reasons: these golden rules were fundamentally incompatible with vast expansion in the size, scope, power, and cost of government over the past century, and incompatible also with the concomitant shift to more subjective, less rule-bound, and more discriminatory norms of public spending and finance. In money, discretion has displaced rules (of any kind); in fiscal affairs the “ability to pay” principle of taxation has displaced the benefits principle, while transfer spending on needs and consumption has displaced outlays on the needs of production.  An erosion of the golden rule of morality has bred discriminatory public governance, necessitating substantially less-sound and less-stable systems of both public money and public debt.

The erosion of sound public finance and public money reflects a diminution in the justice-oriented “benefits principle,” which links the value one receives from public goods and services to the price (in taxes or fees) one pays for them. This link is severed by the increasingly dominant “ability-to-pay” principle, which embodies the Marxian adage that contributions – whether in taxes paid or loans made – must come “from each according to his ability,” with proceeds sent “to each according to his need.”  Wealth is forcibly transferred from “greedy” producers to needy consumers, with deleterious effects on saving, investment, productivity, and living standards. More confiscatory taxes impose injustices and degrade incentives to produce; if instead public debt is incurred to facilitate the transfer, its full servicing is ultimately jeopardized by a successively less-dynamic (because capital-starved) economy.

See Buchanan. 1985. “The Moral Dimension of Debt Financing,” Economic Inquiry 23(1): 1-6.

NEEDED: What Buchanan and Congleton (1998) call “nondiscriminatory democracy.” They propose a “generality” standard whereby constitutions and statutes bar government from making or imposing anything other than general rules applied to and abided by all, equally.[29] Public burdens and burdens must match, as far as possible, which precludes exploitative cases in which select individuals and groups are compelled to suffer net burdens so that others may enjoy net benefits. The principle is embodied in the U.S. Constitution, not only in its bill of rights (barring invasions of the liberties of all citizens, equally), but in its “general welfare” clause (preamble), its tax uniformity requirement (Article I, Section 8), its “equal protection” clause (fourteenth amendment), and its “guarantee” not of a democratic but “a republican form of government” (Article IV, Section 4). Each provision implicitly precludes a welfare state, unconstrained majoritarianism, and  any sort of public governance that serves not general but particular (individual or sub-group) welfares at the expense of other welfares. The result of disparate treatment, in modern parlance, is rent-seeking, pressure-group warfare, special-interest legislation, intergeneration inequity, unsound money, unsound finance, and unpayable debts.

Prospects for a revival

Fiscal rules, including the GRPF, are not likely to be adopted – and if adopted, not faithfully executed – if the majority in a democracy rejects the golden rule, free-rides, and politically envies, exploits, or dispossesses economic minorities (those with high income and vast wealth).[30]  Nor can monetary rules be adopted in that context. Politicians and policymakers likewise eschew rules that are insupportable electorally.  Even unelected, tenured, elite academic economists oppose, almost unanimously, fiscal and monetary rules that might, as they have in the past, constrain public borrowing and monetization.[31]

A citizenry that favors a government of great size, scope, and power necessarily also favors a government of great cost – to liberty and prosperity.  If that citizenry also wishes to shirk and deflect personal responsibility for the high cost of government, it will oppose institutions and rules that tie rulers’ hands. Ultimately, qua subjects, citizens will increasingly favor rulers without rules – i.e., rulers substantially free of constitutional, fiscal, and monetary restraints because free also of moral restraints.

A revival of the GRPF, like that of the gold standard, doesn’t face insurmountable technical barriers; it’s possible if a majority of citizens favors constitutionally-limited government, which is the more likely if they reject the dominant “ability-to-pay” principle in favor of the benefits principle (users pay), which is the more likely if they adopt the golden rule of morality in place of exploitation, parasitism, and free-loading. Fiscal-monetary rules derive from broader constitutional norms which derive, in turn, from moral (and rights-based) norms and codes. No fiscal-monetary rule – even if logically-argued, empirically-grounded, and prudently-executed – can long survive the pressure exerted, inevitably, by the insatiable, resource-hungry state eager to please its dependent subjects.



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White, Bill. 2014. America’s Fiscal Constitution: Its Triumph and Collapse. New York: Public Affairs.



[1] The GRPF is distinct from the oft-related principle that public budgets should be balanced over the course of a business cycle, with deficits incurred during recessions (as revenues decline) and surpluses incurred during expansions (with proceeds used to repay debt). The GRPF pertains to the use made of funds (whether for investment or consumption) borrowed publicly at long maturities. Cyclical issues are relevant to GRPD analysis because in recent decades debt-financed consumption, more than infrastructure spending, has become the preferred fiscal prescription for curing recessions, and surpluses are rare, so debts incurred are rarely reduced. The norm of “balance the budget over the cycle” also has been abandoned. Strict adherence to a GRPF, which forbids deficit spending for ordinary outlays, implies that deficits caused by recessions necessitate spending cuts, tax hikes, or both, typically a pro-cyclical (thus inadvisable) policy mix. The GRPF also is unrelated to the “golden rule of capital accumulation,” embedded in models of “steady state” economic growth beginning in the 1950s.

[2] For defenders in recent decades, see Lutz (1947), Buchanan (1958, 1967), Buchanan and Wagner (1977), Wagner (2012), Merrifield and Poulson (2017), and Salsman (2017).

[3] Jonathan Gruber, Public Finance and Public Policy, Fifth Edition. New York: Worth Publishers, 2016.

[4] See Schumpeter, “Gladstonian Finance” (1954, pp. 402-405) and Salsman (2017, pp. 86, 166-167). William Gladstone (1809-1898) was Britain’s prime minster or chancellor of the exchequer in two-thirds of al years from 1852 to 1894; he extolled (and practiced) limited government, sound money (the gold standard), sound finance (balanced budgets), and free trade.

[5] That citizens should only pay for what they get and get what they pay for, regarding public goods, is another bygone fiscal rule, the “benefits principle,” which has been displaced by “ability to pay,” the principle that richer citizens should pay disproportionately more for public goods, in excess of value received, while poorer citizens should receive value from public spending in excess of what they might pay for them (if anything).

[6] Significantly, in private-sector transfers to heirs governed by wills, probate courts permit the deceased to transfer positive but not negative-net-worth estates; if private debts are bequeathed, they must be accompanied by assets of equal or greater value. No such protection is afforded future generations that are compelled to service public debts incurred by ancestors; they may receive public assets that are worth less than the debts.

[7] The influential public finance text by Musgrave (1959) succinctly captured the theoretical shift in the twentieth century, with “The Benefit Approach” (Chapter 4) followed by “The Ability-to-Pay Approach” (Chapter 5).  As a Keynesian social democrat, Musgrave favored the latter principle. The most influential previous public finance text by Lutz (1947) defended the benefit principle. Whereas Lutz favored a limited state, Musgrave did not.

[8] The U.S. Constitution refers to the public debt, but only to say Congress has the power to incur it and raise taxes to repay it (Article I, Sect. 8) and that it is valid regardless of how or when it is incurred (Article VI).

[9] Policymakers are understandably reluctant, amid recessions, to narrow budget deficits by spending restraint and/or tax hikes, so they resist “austerity” budgets. Yet studies of fiscal consolidation show that while tax hikes make recessions worse, spending restraint does not. See Alesina and Ardagna (2010) and Guajardo et al (2011).

[10] The SGP caps the budget deficits and public debts of each of each member state (twenty-eight of them) at 3% and 60% of GDP, respectively. A member state that breaches the caps must take “corrective” action by an Excessive Deficit Procedure (EDP) and failing that, faces fines and economic sanctions, but there is no strict enforcement of the SGP. Since 2008 at least a quarter of the members has been perpetually non-compliant. Sweden and Luxembourg are the only member states which have never breached the caps since 1998.

[11] On the many ways Keynes and the Keynesians undermined fiscal rectitude, see Buchanan and Wagner (1977). Yet Keynes also worried if public debt wasn’t used for public investment; see Brown-Collier and Collier (1995).

[12] “Fiscal Nihilism and Beyond,” Chapter 19 in Buchanan (1967).

[13] See Eusepi and Wagner (2018).

[14] Barro (1989).

[15] See Buchanan (1987) and a tardy but able rebuttal by Eusepi and Brennan (2002).

[16] See Roos (2019), which contends that “the profound transformation of the capitalist world economy over the past four decades has endowed private and official creditors with unprecedented structural power over heavily indebted borrowers, enabling them to impose painful austerity measures and enforce uninterrupted debt service during times of crisis—with devastating social consequences.”

[17] “Outlays by Superfunction and Function,” Table 3.1, Historical Tables, Budget of the U.S. Government. Spending on “Human Resources” includes spending on education, training, employment, social services, health care, income security, Medicare, and Social Security.

[18] What I call “the paradox of profligacy” – successively-lower sovereign bond yields despite successively-higher public leverage in recent decades – is attributable partly to lower inflation and partly to central bank policies that impose near-zero interest rates and “financial repression.” See Salsman (2017, pp. 25, 247-253).

[19] “Total Investment Outlays for Major Public Physical Capital, Research and Development, and Education Training,” Table 9.1, Historical Tables, Budget of the U.S. Government.

[20] See “Shares of Gross Domestic Product: Gross Private Domestic Investment” (

[21] “State and Local Government: Gross Investment,”

[22] “Business Sector, Real Output Per Hour of All Persons.”

[23] See Churchill & Yew (2017), which examines the “common perception is that government transfers are harmful to economic growth” and finds that they are “more detrimental to economic growth in developed countries compared to less-developed countries because such transfers can have a non-monotonic effect on growth. When government transfers are substantial, as they are in developed countries, they tend to reduce growth.”

[24] Lledo et al (2018), p. 5.

[25] Truger (2015).

[26] In truth, little public infrastructure is built without heavy reliance on the private sector for materials, equipment, factories, transportation, architectural-engineering services, and labor; the biggest public roles are in permitting, planning, and funding.

[27] Barro (2003) finds that “for given per capita GDP and human capital, [economic] growth depends . . . negatively on the ratio of government consumption to GDP.”

[28]  See Saturno (1998) and Istook (2011).

[29] On the generality standard, see also Buchanan (2005).

[30] The normalization of envy and exploitation of “the most advantaged,” embodied in John Rawls’s theory of justice (1971), is discussed (and heartily endorsed) by Green (2013).

[31] See recent polls of academic “experts” conducted by the University of Chicago’s Booth School of Business, on the gold standard (2012: and a balanced budget amendment (2017:



  • January 27, 2019 at 12:58 AM

    Currently, the leading source of campaign contributions is capital gains on securities and real estate. A primary manner of creating those capital gains is government spending, credit allocation and rule making that lift corporate profits or shift market share to companies or real estate owners. Another is privatization at below market levels – shifting assets (including intellectual property) out of government at below market value or shifting liabilities in without adequate fair value compensation. This cycle of profit generation has created government budgets and finances that are not optimized for impact on the GDP – but rather simply serve centralization of political and economic power. It is the primary source of inequality and the slow down of productivity.

    How do we address the addiction to privilege inherent in this system? One of the critical aspects is to bring transparency to the “negative return on investment” of federal activities in a place with place based financial statements.



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