Full text: Effective Demand in the Short Run and in the Long Run

2 
deficit spending as it would be appropriate in an economy with a 
continuing tendency to underemployment. Such permanent deficit 
spending has been envisaged by Kalecki in the last war as a 
possible or perhaps probable necessity for maintaining^full 
employment in the postwar economy, and he proposed to finance the 
interest payments on the debt by a capital tax or by an income tax 
so designed that it would not discourage investment. Thinking on 
very similar lines Domar produced a model with exponentially 
rising national income and deficit spending in constant proportion 
to it, which showed that the public debt as a ratio of national 
income converged to a constant value in the course of time. On 
( tXLy. 
Kalecki's assumption the tax payers could be supposed to have the 
A 
same propensity to save as the "rentiers” who received the 
interest on the public debt so that no effect on'demand would 
result from the transfer of income from taxpayer to rentier. Domar 
seems to have made the same assumption implicitly in his model. 
While Kalecki's assumption was a policy recommandation we are 
faced today with actual deficit spending over long periods in some 
countries where his recommandation with regard to taxation seems 
hardly to be followed. We have therefore to ask ourselves how 
Domars model would have to be modified if we assume that the 
receivers of the interest have a high propensity to save while the 
tax payers on the contrary save only little. In this case it will 
be necessary, if adverse effects on demand and employment are to 
be avoided to have additional deficit spending so as to offset the 
excess saving of the rentiers. 
I follow Domar in assuming that the yearly deficit spending is a 
constant proportion 6 of the national income Y. It may be imagined 
that this is the spending necessary to ensure that the employment 
and capacity use remain constant and the national income increases
	        

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