Adam Smith on Balanced Budget Government Spending

Abstract

One of the biggest problems the Reagan administration faces is to balance the federal budget. This problem of government over-spending has been around for a long time. One might therefore not be surprised to find that Adam Smith in his Wealth of Nations, discussed reasons why it was to the advantage of a nation to return to overall balance of its budget. The reasons Smith advanced have surprisingly modern applications and it might be worthwhile for some current politicians and economists to pay closer attention to them. The main portion of the argument is that each time a deficit occurs, it leads io future deficits which become progressively larger in size: it also leads to larger future tax increases than would have been necessry to initially balance the budget. This is a long run argument whose full force has been neglected by modern politicians who are preoccupied with the short-run goal of financing deficits one year at a time. Yet, it is an argument which shows how modern were Smith's ideas stated more than 200 years ago. An examination of his arguments will indicate some factors which should be considered every time the budget is left in deficit.