Chapter 3: Budget Deficits, Ricardian Equivalence, and Macro–Micro Supervenience
The principle of sound finance reflected an ideological belief that the business of government was to manage itself, just as people and business enterprises had the business of managing themselves. The economy would take care of itself if people and governments managed themselves properly. This ideological framework was given reasoned theoretical articulation through the classical branch of economic theory, where what was good and prudent conduct for one entity in society was good and prudent for all entities. The fiscal conduct of governments was shaped and channeled by that set of beliefs. But beliefs can change, and they did. The Keynesian revolution brought forward the possibility that what might be regarded as folly for individuals and businesses could perhaps be a requirement of prudence for a national government. In this articulation, government acquired the duty to manage the economy as well as to manage itself. It is surely noteworthy that macro theory arose in the 1930s, taking root in soil prepared by the Progressive movement over the early part of the twentieth century. This was a period of intense belief in the superiority of collectivism as a framework of social organization, and the primary question was whether power would be wielded with a velvet glove or a mailed fist. Macro theory developed as a vehicle for showing how the velvet glove could be used to manage the economy, thereby keeping the mailed fist at bay. In consequence, budget deficits, even chronic deficits, lost their status as a clear sign of...
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