Is Adam Smith's discussion of governmental "juggling trick" relevant to our policy discourse today?

|Peter Boettke|

Scott has already talked about this at The Economic Way of Thinking, but we should dig a bit deeper into the discussion from Smith's Wealth of Nations, Vol. 2, pp. 929-2930.  Smith argues in those pages that: (1) when the public debt reaches a certain level, the fiscal system is threatend, but there is not a single instance where a government has paid off the debt fairly and completely; (2) rather than pay down the debt with increased taxes, government's choose "pretended payment"; (3) the prefered method of pretend payment is repudiation through debasement of the currency; (4) this method extends the 'calamity to a great number of other innocent people'; and (5) rather than do the right thing -- which would be least dishonorable to the debtor, and least hurtful to the creditor -- government instead choses to engage in "juggling trick".

Should these sort of issues be on the table when discussing our current public policies -- from the financial crisis to the health care debate?  I think so.  Perhaps for the health of the economic system and the future of our kids and grandkids, we should take the juggling power out of the hands of our political leaders.

Comments

[Arne]

In Switzerland we actually have some kind of solution for this problem called the "debtbrake" (Schuldenbremse):
Whenever the new debt reaches a certain level (which in the near future will be somewhere close to 0 new debt over the business cycle) the government can increase the debt, but has to increase taxes at the same time, so that only half of the new payments can be made by increasing debt levels. And as raising taxes are met with obligatory public vote on the tax raise, this includes the increasing debt as well. So if the public decides that one project is worth the increasing tax level, it could be financed at least partially by dept, but this is already the limit.
There are some loopholes (like the debt of social security that is not yet included in this system) and it does not work perfectly, but it is a quite nice solution.

[Students Resource]

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