Deficits, elections and the politics of economics

At the start of the previous section I showed how, in the 1950s and early 1960s, welfare economists developed the theory of market failure as a chal­lenge to the orthodoxy of laissez-faire economics.

To this argument, Buchanan and Wagner’s (1977, 1978) public choice riposte runs as follows. Keynes was an economist who saw his role as being one of acquiring knowledge and offering advice to a small group of enlightened politicians who could be trusted to do the ‘right thing’. Keynes did not stop to consider the application of his policy prescriptions to a democratic society in which parties fight to gain and retain elected office. At times of impending recession, vote-maximizing politicians will increase expenditure and cut taxation because it will be in their self-interest to do so. Politicians know that voters prefer high public expenditure to low public expenditure and low taxation to high taxation and that raising the former and reducing the latter will therefore increase their chances of being re-elected. But they have no corresponding incentive to cut expenditure and increase tax during periods of economic boom.

The grafting of Keynesian economics onto the fabric of a political democracy has wrought a significant revision in the underlying fiscal constitution. The result has been a tendency toward budget deficits and, consequently, once the workings of democratic political institutions are taken into account, inflation. (Buchanan and Wagner 1978: 23)

Between 1951 and 1955 only one of what was to become the G7 countries - the United States, Canada, Japan, France, Germany, Italy and Britain - ran a government budget deficit. Between 1961 and 1965 every single one did so (Mueller 2003: 464-5). Such was the difference made by Keynesianism. As the economic recession in the 1970s was eventually to prove, the economic costs of vote-maximizing Keynesianism were severe. For politicians seeking re-election in the 1960s these costs were, however, beyond their political horizon. Self-interested politicians have reason to care about what happens in the next election and, perhaps, the one after that. They have no self-interested reason to weigh the short-term benefits of more votes against the long-term costs of eventual recession.