30 Apr 2012

Essay Topic: Economic Crisis

The thesis projected by Money-Financed Deficits and Political Democracy, chapter 8 of Democracy in Deficit is that of “the continuing confusion generated by a stubborn failure to distinguish carefully between genuine public borrowing and money creation.” (p.79) This failure has caused important shifts not only in monetary policy but on US politics in general, including the current economic crisis and the social and political results of it.  It is very important to note that: “fiscal adjustments—budgetary management, the creation of deficits or surpluses—provide the primary instruments for the implementation of macroeconomic policy.”(p.79)

The authors argue that the Keynesian destruction of pre Keynesian norm, without an adequate replacement, has brought on the situation that has stared to emerge in the late 1970s making budget deficits into a normal course of events. (p.95-96) This has not only had an effect on the monetary system, but the policy of budget deficit as a normal system has caused important political shifts in the United States and worldwide. The politicians have started spending more then tax revenues, which is a problem that is at the root of the current economic crisis.

According to Buchanan and Wagner, purely Keynesian systems cannot work in the neo liberal system, but could work in a mild dictatorship. (p.79-80) The problem of Keynesian economic systems not being able to function in modern democracies lies in the fact that professional politicians have used the possibility of budget deficits to ensure stability during their terms but did not look forward, causing finally the deficit to become too elevated and finally threaten the world economy. The Keynesian system should work in a way that the enlightened few have the control of the monetary policy, but in the modern politics there is no center of power where an enlightened few can effectively isolate themselves from constituency pressures” (p.98) The only way Keynesian policies can work in a macroeconomic system is through a combination of the Keynesian and traditional system in which the technocratic influence should be substantial.

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