Wranglings over spending plans, deficits and public debt increases have been quite intense of late. What is quite surprising, at least at first glance, is that there are so few individuals who are arguing for reducing public spending. Right now, the most “hawkish” policy stance is a slower rate of spending increases. Why the pro-spending tilt of debates?
One could argue that its the pandemic. A crisis is, after all, a natural moment to increase spending. However, that argument is a bit weak now. This position was easily defensible six to twelve months ago, but not today when the economy is starting its recovery. If anything, as recovery is underway, the case for slashing spending levels is stronger than the case for raising them.
So, once again, why the pro-spending tilt? Let me point to the work of James Buchanan and Richard Wagner in Democracy in Deficit. In this work, whose lessons are underappreciated today, Buchanan and Wagner argue that there is an asymmetry in the political returns to fiscal policy. This is known as fiscal illusion. When a deficit occurs, the costs are delayed and thus harder to observe. The benefits are immediate. When a surplus takes place, the benefits are delayed and the costs (i.e. less spending, higher taxes) are immediate.
Second, there’s the far more serious threat of fiscal illusion—that the public’s perception of the true costs and benefits of government expenditures is misconstrued. As long as the costs of taxation are underestimated and that the benefits of public expenditures are overestimated, there’s fiscal illusion. The nature of politics thus creates a strange incentive system where governments reap more electoral rewards from deficits than from surpluses. If you buy Buchanan and Wagner’s explanation, the pro-spending tilt is easy to explain.
However, the empirical evidence for this is somewhat limited. For example, Alberto Alesina in the 1990s, showed that he could not find empirical patterns that confirmed Buchanan and Wagner’s theorizing. But, I have recent work (co-authored with Marcus Shera of George Mason University — a good graduate student of mine) which proposes a simple mechanism by which to observe whether the first condition for a pro-deficit/pro-spending tilt is present.
American presidents are incredibly mindful of their historical reputation. As I argued elsewhere, presidents consider historians as a constituency they want to cater to so as to be remembered as great. If there is a reward from engaging in deficit spending given by historians, this would suggest that presidents have at least some incentives to be fiscally imprudent. Phrased differently, such returns by historians would suggest some divergence between what is fiscally prudent and what is politically beneficial.
Using the surveys of American presidents produced by C-Span and the American Political Science Association, Marcus and I found that there are strong rewards to engaging in deficit spending. Without any controls for the personal features (e.g. war hero, scandal, intellect) of a president and the features of a presidency (e.g. war, victory in war, economic growth), an extra percentage point of deficit to GDP is associated with a strong positive reward to a president (see table below). Once controls are introduced, the result remains: there are strong rewards from engaging in deficit spending.
Thus, at any time, a president who is mindful of his place in the history books would be tempted to engage in deficit spending. While Marcus and I are somewhat cautious in the paper, I do think that we are presenting a “lower-bound” case for a pro-deficit bias. Indeed, one could think that the hindsight of history would lead to greater punitions for fiscal recklessness. After all, historians are not like voters — their time-horizons for evaluating a presidency are clearly not as short. If that is the case, one should expect that historians should be less likely to reward deficits. And yet, they seem to do so — which is why I argue this is a lower-bound case.
In other words, Joe Biden might simply believe that the extra spending will secure him a place in history books. If other presidents are any indication, he is making a good bet.
” nature of politics thus creates a strange incentive system where governments reap more electoral rewards from deficits than from surpluses” – – makes pretty good sense to me. Anecdotally, I do observe people being pleased at receiving largesse from “the government”.