An economic history lesson on fiscal responsibility

Lynne Kiesling

At the Atlantic’s newish business web site, Greg Clark has a very good post on the history of government spending in Britain. He starts in the early post-Magna Carta period:

In England, for example, from the Magna Carta of 1215 until the Glorious Revolution of 1689, public debt was always tiny — a few percent of national income.  This was because while the King controlled expenditures, the English Parliament controlled taxation. And Parliament refused to tax. …

Without a ready tax source, the early Kings were the ultimate sub-prime borrowers. Royal borrowing was at extremely high interest rates. The only lenders were financial adventurers willing to risk periodic defaults.

Then after the Glorious Revolution constrained the ability of the sovereign to borrow, putting both the taxation and expenditure function in Parliament. Quelle surprise, spending increased dramatically! But since taxation was extremely unpopular, Parliament funded this spending with, you guessed it, borrowing. Thus the 18th century saw unprecedented levels of government debt leading up to the Napoleonic wars, debt that only lessened with the reduction in government military spending after Napoleon’s defeat.

He then draws some conclusions for our current debt situation, highlighting the costs of government debt-funded spending. Part of Greg’s conclusion really struck me:

But because this damage is creeping and insidious — not as obvious as hacking off a limb — it will never motivate real political action.

Yet again, as in my post yesterday about the erosion of civil liberties in Britain, I am moved to invoked the “frog in a pot of water” metaphor. The costs of crowding out private spending and private entrepreneurial activity are not only creeping and insidious, they are part of Bastitat’s unseen. When we don’t pay attention to those costs, we underestimate the costs of this debt-funded spending, and therefore derive an incorrect estimate of the net value of the spending.