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Democracy in Deficit is one of the early comprehensive attempts to apply the basic principles of public-choice analysis to macroeconomic theory and policy.

According to Robert D. Tollison in the foreword, “The central purpose of the book was to examine the simple precepts of Keynesian economics through the lens of public-choice theory. The basic discovery was that Keynesian economics had a bias toward deficits in terms of political self-interest.”

Democracy in Deficit opened the door for much of the current work on political business cycles and the incorporation of public-choice considerations into macroeconomic theory. Even in the area of monetarism, Buchanan’s landmark work has greatly influenced the sway of contemporary theorists away from the nearly universally held belief of Keynesian theory.

Democracy in Deficit contributes greatly to Buchanan’s lifelong fiscal and monetary rules to guide long-term policy in macroeconomics. The book serves to bolster Buchanan’s central beliefs in the necessity of a balanced-budget amendment to the U.S. Constitution and in monetary rules rather than central bank discretion.

The book is co-authored with Richard Wagner, a respected colleague of Buchanan, whom Buchanan recognized as helping to keep the book free of polemics and on target with its central purpose of applying the elementary theory of public choice.

"Whether they like it or not, those who seek to understand and ultimately to influence the political economy must become political economists. Analysis that is divorced from institutional reality is, at best, interesting intellectual exercise. And policy principles based on such analysis may be applied perversely to the world that is, a world that may not be at all like the one postulated by the theorists. Serious and possibly irreversible damage may be done to the institutions of the political economy by the teaching of irrelevant principles to generations of potential decision makers. Has the teaching of Keynesian economics had this effect? The question is at least worthy of consideration.
We might all agree that something has gone wrong. The record of deficits, inflation, and growing government is available for observation. We must try to understand why this has happened before we can begin to seek improvement. Our central thesis is that the results we see can be traced directly to the conversion of political decision makers, and the public at large, to the Keynesian theory of economic policy. At a preliminary and common-sense level of discussion, the effects of Keynesian economics on the democratic politics of budgetary choice seem simple and straightforward, whether treated in terms of plausible behavioral hypotheses or of observable political reality. Elected politicians enjoy spending public monies on projects that yield some demonstrable benefits to their constituents. They do not enjoy imposing taxes on these same constituents. The pre-Keynesian norm of budget balance served to constrain spending proclivities so as to keep governmental outlays roughly within the revenue limits generated by taxes. The Keynesian destruction of this norm, without an adequate replacement, effectively removed the constraint. Predictably, politicians responded by increasing spending more than tax revenues, by creating budget deficits as a normal course of events. They did not live up to the apparent Keynesian precepts; they did not match the deficits of recession with the surpluses of boom. The simple logic of Keynesian fiscal policy has demonstrably failed in its institutional application to democratic politics."

James M. Buchanan

In 1986 James M. Buchanan (1919-2012) was awarded the Alfred Nobel Memorial Prize in Economic Sciences. Universally respected as one of the founders of the “public choice” school of economics, he is the author of numerous books and hundreds of articles in the areas of public finance, public choice, constitutional economics and economic philosophy. He is best known for such works as The Calculus of Consent, The Limits of Liberty, The Power to Tax, and The Reason of Rules. Buchanan has devoted himself to the study of the contractual and constitutional basis for the theory of economic and political decision making.

See also at Econlib: the Concise Encyclopedia of Economics entry on Buchanan