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10 of 10 people found the following review helpful:
4.0 out of 5 stars
Public-choice perspective of public debt finance, October 19, 2004
The authors, James M. Buchanan and Richard E. Wagner, offer two main points of criticism of the Keynesian prescription of deficit spending during recession. They first expose the internal inconsistency of Keynesianism that, if it were true, during an economic recession with slack resources, public spending increases could simply be financed by the creation of money rather than the issuance of interest-bearing debt (pp. 34-35).
More important, however, is the authors' public-choice criticism of Keynesianism. The Keynesian doctrine of deficit spending provided the academic excuse for elected representatives to spend without taxing, thus removing the self-imposed discipline of balanced budgets that had existed prior to the adoption of Keynesian thinking (p. 4): "The legacy or heritage of Lord Keynes is the putative intellectual legitimacy provided to the natural and predictable political biases toward deficit spending, inflation, and the growth of government" (p. 26).
Keynesianism might perhaps work under a system of benevolent dictatorship, but not in a democratic setting with citizens who are both taxpayers and beneficiaries of public services, professional politicians, political parties and government bureaucracy (pp. 79-80). "Political decisions in the United States are made by elected politicians, who respond to the desires of voters and the ensconced bureaucracy. There is no center of power where an enlightened few can effectively isolate themselves from constituency pressures" (p. 98).
Elected public officials display a bias towards spending public funds on projects that yield tangible benefits to their constituents, and towards not encumbering them with a tax bill to pay for those projects. "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" (pp. 95-96).
Buchanan considers the argument of the book that in a democratic setting there is a bias towards deficit finance "perhaps the single most persuasive application of the elementary theory of public choice" (p. xv). Indeed, the reform proposals introduced, particularly the constitutional balanced budget amendment, are to be thought of as "rules...designed to constrain the short-run expedient behavior of politicians" (p. 9).
This is chronologically the first publication on public debt finance in the Collected Works series where Buchanan has proposed a constitutional balanced budget requirement (pp. 166, 183-184, 187-188). Buchanan, more than anyone else, offers the most persuasive argument for such a requirement, and thus this volume is still worthwhile. But volume 14 in the series (Debt and Taxes) offers a richer variety of papers by Buchanan on the subject of public debt finance, including the constitutional balanced budget amendment.
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5 of 6 people found the following review helpful:
5.0 out of 5 stars
Rare Political Economy Case Study, January 27, 2007
Comprehensive analysis of the political and economic effects of Keynesianism from a public choice perspective. This is an impressive look at the lasting changes in the economic order since Keynes' ideas were adopted by politicians and influential economists alike.
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11 of 26 people found the following review helpful:
1.0 out of 5 stars
Keynes never supported deficit finance(or functional finance), June 25, 2005
This review is from: Democracy in Deficit: The Political Legacy of Lord Keynes (Hardcover)
J. M. Buchanan's(JMB)book is completely mistitled and out of date.Nowhere in any of Keynes's writings does Keynes ever advocate a policy of deficit finance,which is actually the brain child of Abba Lerner,a member of the American Keynesian-Neoclassical Synthesis school of economics.Lerner used the term functional finance to describe deficit finance.During a visit to America in 1944 as the representative of England's Treasury Department,Keynes totally disagreed with Lerner's approach.Keynes's approach is an advanced version of the cyclically balanced budget first laid out in clear terms to the Pharaoh by Joseph some 3,700 years ago-build up a surplus in the good years that will cover the deficits of the bad years.This is the first statement of what economists call a countercyclical fiscal policy.Keynes's additional provision is that the budget be split into two categories-one of which would be a capital budget.The government could only run deficits in the provision of capital projects in public infrastructure(building dams,reservoirs,water projects-irrigation networks,seaports,airports,public transportation projects,public schools,colleges and universities,public research laboratories,etc.,)that would pay for themselves in the long run.Nor was Keynes an advocate of tax cuts in an economic downturn except for temporarily suspending the social security tax for workers only.Keynes's major policy recommendation was the maintenance of low interest rates combined with a central bank policy of eliminating loan availability for speculative undertakings(greenmail,leveraged buyouts,hostile takeovers,margin account loans,corporate raiders,junk bonds,etc.).The correct title for JMB's book up until 1981 is"Democracy with minor to moderate deficits:The Political Legacy of the American Keynesian-Neoclassical Synthesis School".After 1981,JMB should have retitled his book as"Democracy and Catastrophic Deficits:The Political Legacy of Laffer,Reagan,and the 12 years of the Two Bush Presidencies" .The national debt when President Reagan took office stood at 925 billion dollars.As of July,2005,the national debt will have surpassed 8 trillion dollars.The Libertarian-pseudo conservative policies of tax cuts,borrowing and excessive spending of 8 years of Reagan and 12 years of the two Bush presidencies has increased our national debt by a factor of 9.JMB needs to completely rewrite his book.First,he needs to incorporate the theoretical foundations of the story of Joseph and the Pharaoh from the Old Testament.He will probably need to purchase a bible in order to correctly cite verse and page.Second,he needs to obtain a copy of Keynes's General Theory and read what Keynes actually wrote and not what Henry Hazlitt claims what Keynes meant in his 1959 "Failure of the 'New Economics'".
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