Sunday, February 19, 2017

Democracy and debt

"A beauty of MacDonald’s idea is that it can be tested against

situations he doesn’t discuss. Thus the democratic decolonization of

India fits: It occurred after India had become a large war-time

creditor of Britain. And the struggle for democracy in Latin America is

complicated by foreign debt, easily analyzed as an external electorate

of enormous power–one in obvious economic conflict with the voters who,

at best, only hold the internal debt. The communists of China and Cuba

maintain their insular systems because they are financially autarkic.

Meanwhile, in democratic Venezuela, the rise and survival of Hugo

Chávez owes everything to the singular financial autonomy conveyed by

Finally, MacDonald’s financial perspective helps explain the

relationship between democracy and economic development. The most

democratic states are not only powerful; they are rich. They are richer

than the monarchies they succeeded and also than the communist states

with whom for much of the twentieth century they competed. Why? Surely

the simplest answer lies in their ability and willingness to mobilize

public debt for development as well as for war. Democracies yield

higher incomes not because of vulgar redistribution, which cannot

distinguish them from communism, but because they alone can master the

great Keynesian financial tools required for the achievement of full

employment and national construction on the grand scale.
Given the simplicity and power of this argument, one reads the

epilogue of this great book with surprise and sorrow. In MacDonald’s

view, it’s all over. In the nuclear age, deficits and bond drives on

the world-war scale are history, and the American citizenry has lost

its pride of place as creditor of the American state. Today, financial

intermediaries hold about 37 percent of U.S. public debt; Japan and

China, along with other countries, now hold about 30 percent. The

proportion of U.S. debt owned directly by Americans has fallen to below

10 percent; in 1945 (when the debt was more than twice as large in

relation to GDP as now) citizen-creditors just about held it all. He

concludes that the link is broken and “for all practical purposes, the

venerable marriage between public credit and democratic government, so

vital a factor in the history of the world, has been dissolved.”
But there is another possible way to interpret this fact. If

MacDonald’s thesis is right, the disappearance of the citizen-creditor

forces a question. Can democracy survive when its financial roots have

been cut? The scale of public debt is not the issue, but its ownership

is. Can a country–whether the United States or any other–be truly

democratic if it is in hock to banks and foreigners? And this is only

the obverse of questions raised by our pathetic voter turnout, by the

vote suppression that regularly poisons our elections, by the judicial

coup d’état of December 2000, and by our regression toward a tax system

from which the state’s main creditors are exempt, leaving the burden to

fall heavily on all who do not or cannot vote–exactly those who

comprise our passive and disregarded lower classes.To put it bluntly, are we still a democracy? And, if not, what would it take to bring democracy back?"

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