Democracy in Deficit - 2. The Old-Time Fiscal Religion

The history of both principle and fiscal practice may reasonably be divided into pre- and post-Keynesian periods
The classical principles can be coinceived in the same image as that by the family * Frugality was accepted as the cardinal virtue * Deficits were to be tolerated only in extraordinary circumstances
Classical or pre-Keynesian fiscal principles, in other words, supported a budget surplus during normal times so as to provide a cushion for more troublesome periods.

Pre-Keynesian fiscal practice was clearly informed by the classical notions of fiscal responsibility * There were considerable year-to-year fluctuations in receipts, in expenditures, and in the resulting surplus or deficit. * Deficits emerged primarily during periods of war; budgets normally produced surpluses during peacetime, and these surpluses were used to retire the debt created during war emergencies.
Book proceeds to talk about surpluses and deficits during 1700s to 1900s. * Until 1946, then, the story of our fiscal practice was largely a consistent one, with budget surpluses being the normal rule, and with deficits emerging primarily during periods of war and severe depression. * The history of fiscal practice coincided with a theory of debt finance that held that resort to debt issue provided a means of reducing present burdens in exchange for the obligation to take on greater burdens in the future. * It was only during some such extraordinary event as a war or a major depression that debt finance seemed to be justified.
Fiscal theory began to change during the 1930s. * The Keynesian theory of public debt emerged. * This theory explicitly denies that debt finance places any burden on future taxpayers. * It suggests instead that citizens who live during the period when public expenditures are made always and necessarily bear the cost of public services.

To fund government there are three possibilities: * Taxation * Public borrowing or debt issue * Money creation
When a government borrows, what happens that does not happen when it ﬁnances the same outlay through current taxation? * With borrowing, the command over real resources is surrendered to government by those who purchase the bonds sold by the government.
Who pays for these benefits? * With taxation, the cost is placed on the current beneficiaries. * With borrowing, the cost is postponed until later periods, when interest payments come due.
There exist norms for financial responsibility. * Resorting to borrowing should be limited to those extraordinary circumstances in which spending needs are bunched in time. * Borrowing should be accompanied by a scheduled program of amortization.

Through the Keynesian revolution, there was a shift in the paradigm for the operation of the whole economy. * The nonclassical theory of public debt was superimposed on the nonclassical theory of economic process, which elevated deficit financing to a central role.

We can describe the prevailing rules guiding fiscal choice as a "fiscal constitution". * Pre-Keynes, the fiscal constitution was based on the central principle that public finance and private finance are analogous, and that the norms for prudent conduct are similar. * Public expenditures were supposed to be financed by taxation, just as private spending was supposed to be financed from income.
Keynesianism offered the promise of replacing the old fiscal religion with a better, more efficient fiscal constitution. * But the Keynesian promise has not been kept. The economy has not performed satisfactorily, despite the Keynesian-inspired direction of policy.