The Constitutional Political Economy of Deficits and Public Debt

Jonathan W. Plante

Advisor: Peter J Boettke, PhD, Department of Economics

Committee Members: Christopher J. Coyne, Rosolino A. Candela

Buchanan Hall, #D180
November 02, 2023, 12:00 PM to 02:00 PM

Abstract:

This dissertation provides an economic explanation for the United States' deficit and public debt. Unlike most economic and political economy explanations, this dissertation provides a constitutional political economy perspective. 

Chapter one is based on a review essay of Olivier Blanchard's recent book Fiscal Policy under Low Interest Rates, forthcoming in Journal of Public Finance and Public Choice. In this essay, I critique Blanchard's conclusion that, when interest rates are low, politicians can use public debt finance to increase welfare for all individuals. Specifically, I argue that Blanchard's argument assumes a particular type of political process. It is true that under some political systems, politicians will have incentives to use public debt in a way that improves the welfare for all. However, it is also true that under other political processes, politicians have incentives to increase the welfare for only some individuals—which would mean that some individuals would have their welfare reduced. I conclude that without an examination of the political process governing politicians, Blanchard's conclusion is dubious at best. 

Chapter two heeds the call of chapter one—to incorporate the political processes constraining politicians issuing public debt and deficits. In particular, in this chapter I seek to examine why deficits and public debt have increased since the 1980s. While this has already been done in the political economy of deficits and public debt literature, I offer an alternative perspective. Rather than attributing the increase in deficits and public debt to politicians' actions given rules of time-and-place, I attribute the increase in deficits and public debt to politicians' actions because of a change in the fiscal constitution—the rules constraining politicians' use of the federal budget. Using this alternative perspective, I argue that the Congressional Budget Impoundment and Control Act of 1974 is why public debt and deficits have increased since the 1980s. This is because the Act changed the fiscal constitution: it removed the president's constraint on each congressperson's propensity to use deficit and public debt finance, and, as such, unleashed the fiscal commons.

Chapters three and four build on chapter two by examining the incentives for politicians and interest groups, respectively, to support increases in deficits and public debt. Constitutional exchange does not merely happen without incentives for the parties to the exchange—politicians and interest groups. In chapter three, I argue that politicians have incentives to use deficits and public debt because it allows them to maximize the net present value of their future returns—i.e., gain more political power. Specifically, it allows them to gain more power through the use of rent extraction. In chapter four, I argue that interest groups have incentives to support deficits and public debt because it establishes a fiscal illusion—which masks true costs, and, as such, allows the least competitive and inefficient interest groups to survive. In other words, interest groups and public debt allow more interest groups to be in existence than there would be otherwise.