Taming Leviathan

The current public debt crises in Western democratic countries provide an important illustration of what Adam Smith had described as the “juggling trick” – namely deficit increases, accumulation of debt, and debasement of currency – that all governments resort to when confronted with public bankruptcy. In this paper, we utilize the discussion on the public sector growth to illuminate the puzzle in political economy regarding effective government constraints, or questions of how to ‘tame leviathan.’ We argue that altering the institutional structures to be more polycentric would contain important self-generating mechanisms to tame leviathan. Specifically, we point to the role of hard budget constraints and the role of competition in polycentric institutions for generating incentives compatible for reducing the size of government. Furthermore, we argue that public debt can be reduced by decentralizing money because it would eliminate the federal government’s option of monetizing its debt.