As Greece, and other continental European countries, with the UK and the USA not far behind, stagger under mountains of public sector debt, I wonder what would happen if the world economy slumped into a double-dip recession. Would Paul Krugman in the US and John Quiggin here and the entire world-wide Keynesian brigade advocate more public sector borrowing and spending? Why not? After all, if public spending is the answer; it is the answer.
According to the Keynesian brigade public spending will put unemployed resources to work, spur economic growth and replenish government coffers with revenue. In fact, that is surely the answer for Greece. Austerity is for the faint-hearted. Go Greece! Austerity will simply lower demand and therefore lower growth and make things worse. What is needed is a boost to public service salaries, public sector pensions, and entitlements all round. They should also take a cue from Australia and build thousands of over-priced school halls, libraries and classrooms or any old buildings will do. Then we will see Greece take off.
What, not even Keynesians would advocate this? Well let me put it this way then; if Keynesians would baulk at the prospect of Greece spending its way out of trouble, presumably this will be reflected in their view generally of Keynesian policies and entitlement programs. We can expect to see Krugman, Quiggin, and their fellow travellers, recant. The Guardian, The New York Times, MSNBC and even the BBC and ABC will change their spots and become bastions of conservative economics. They will at last understand that spending money is not the same, nor as good, as making money.
Greece will become a defining event in the history of economic thought. Economists and politicians will look back at that singular event that showed everyone that overspending by countries produces the same kind of collective misery that Mr Micawber lamented it caused for individuals.
Unfortunately, of course, I am dissembling. Greece will change nothing. In the alternate universe occupied by Keynesians, facts, evidence and experience count as nought in the face of the dogma. They will pick themselves up, dust themselves off, and start all over again.
They may say that Greece is a special case where Keynesianism becomes inapplicable because public debt is already too high. I don’t know but they may have some pretext of this kind at the ready. But it won’t fly. Unemployment in Greece is now over 10 per cent. How come, when the budget deficit is around 13 per cent of GDP and public spending has grown at such a pace over recent years that public debt is now 120 per cent of GDP? We have had big spending. The end product surely should have been nirvana not economic stagnation and ballooning indebtedness. You can hardly argue now, at least with any credibility, that Keynesianism is inapplicable because debt is too high, when the very policies espoused by Keynesians have led to the current malaise.
Why do Keynesians believe that government spending of whatever random kind will target whatever specific resources are unemployed; result in useful and productive things being produced, and so allow debt to be repaid? Well the truth is that they don’t, or wouldn’t, if they ever faced up to the issue. Like two dimensional creatures in a three dimensional world, they view the economy through macroeconomic models which reflect such an aggregative view of the economy that all of the important detail, that would remind them of their limitations, is blurred and lost.
Why do some economists and politicians think that governments can spend and borrow more than they can reasonably earn and repay. Well the truth is that they don’t. They always think they can repay it because they are blindsided by large numbers. They know as individuals that they have to live within their means. They know this applies to everyone in their country. But then their minds must go through an Orwellian Nineteen Eighty-Four transformation where two plus two can indeed equal five; where the whole is greater, and sometimes much greater, than the sum of parts. They would know on a desert island that if each of the ten inhabitants picked ten coconuts, there would be just 100 coconuts to share. But once the number of inhabitants reaches, say, ten million and coconuts become one of, say, fifty thousand products, everything apparently becomes possible. They are loosed from the shackles of irksome arithmetic.
I have become convinced that the division between Keynesians and their fellow travelling big entitlement spenders, on the one hand, and economic conservatives, on the other, is more profound than racial, cultural or national divisions. To use and evolutionary term, it is possibly an example of speciation without the benefit of geographical isolation. Two species have developed alongside each other, looking exactly the same, but thinking quite differently. How best to describe it succinctly: one believes in the tooth fairy; the other doesn’t.