Publication Date


Document Type


First Advisor

Fairbanks, Robert P., 1934-1971

Degree Name

M.A. (Master of Arts)

Legacy Department

Department of Economics


Deficit financing; Finance; Public


Within the past decade an issue had arisen which is centered upon the utilization of deficit finance for public expenditures. The disagreeing factions responsible for creating this controversy are those adherents to the new orthodox "opportunity cost" thesis and those proponents of the classical transfer "shifting burden" argument. Both views originated from eighteenth and nineteenth century classical economists. The Keynesian influence of the thirties pushed the new orthodox view into the forefront. The cost of deficit finance, according to the new orthodoxy, occurs at the time of the government expenditure and is, therefore, not shifted into the future. Consequently, the only burden directly attributable to deficit finance takes place in the form of an alternative opportunity foregone at the time of the government expenditure. However, in 1958 James Buchanan reintroduced the late nineteenth century concept that deficit finance actually shifts the real cost of the government expenditure into future periods. Future generations incur a burden which would not exist had the government expenditure been financed through alternative taxation or currency inflation. The volley of argument which has followed from this obvious disagreement has not resolved the issue. Currently, the dispute remains a stalemate. Numerous models have been constructed in an attempt to support the transfer burden thesis. Various burdens of reduced consumption, decreased capital accumulation, and diminished personal utility have been introduced as evidence to the shifting future cost of deficit finance. A review of these models is contained in this thesis. The new orthodoxy claims the classical transferists have not refuted the basic premise that resources are used at the time of the expenditure. They contend that the struggle actually exists as an attack upon straw men. The new orthodoxy recognizes the possible disadvantages of deficit finance, but believes these negative factors must be compared with the available alternatives within the total economic perspective. Deficit finance may restrict the accumulation of capital in future periods, yet such concern is of a secondary nature and should not be the sole factor determining the means of government finance. The new orthodoxy is more concerned with the factors of over-all full employment, growth, and stability. Those who hold this view contend that deficit finance should be used when the social effects of borrowing are desirable. Likewise, taxation should be undertaken when the social effects of taxes sire desirable. Deficit finance and taxation are tools which can expand or contract economic activity. Both these mechanisms should be utilized toward the fulfillment of economic goals which best represent the desires of society. The contractionary and expansionary pressures of government finance should be considered with the existing conditions of economic activity to determine the means of government finance. The co-ordination of these factors provide progression toward a healthy economy. It is from this perspective that the pros and cons of public debt should be evaluated.


Includes bibliographical references.


iii, 43 pages




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