Austerity vs Keynesianism

[Nikitn]

What would work better in the long term for a Europe currently in recession?

Austerity + economical reforms can swiftly kill off uncompetitiveness by destroying weak companies and forcing people to work more for less money. This creates efficiency in the long-term (higher international competitiveness), while hurting growth badly in the short-term.
However austerity comes with the risk of launching a liquidity-trap to the economy, ie starting a self-reinforcing deflationary cycle where instead consuming goods people & companies save money or pay back debt. This is what happened during the great depression (however, since companies today are much less dependant on internal demand, the risk for this is minimal?).

Keynesianism on the other hand has a much more balanced approach, where money is spent by the government to encourage private consumption in bad times, while decreasing spending + conducting painful economical reforms in good times. Keynesianism is dangerous however because politicians might "forget" to carry out the last bit (it would be career-suicide for politicians to carry out unpopular reforms and spend less money), and thus let debt spiral out of control while inefficient sectors of the economy are allowed to survive.

Which is the better option? I would like solely people who have a degree in economics/are working on one to try to answer this in a way a layman like me can understand.

[Dr. Croccer]

Implying they are mutually exclusive.

[Nikitn]

They are per definition mutually exclusive in times of debt-recessions like this1. Austerity = spending less and ignoring fall in private consumption. Keynesianism = spending more and trying to prevent fall in consumption.

[Dr. Croccer]

They are per definition mutually exclusive in times of debt-recessions like this1. Austerity = spending less and ignoring fall in private consumption. Keynesianism = spending more and trying to prevent fall in consumption.

1. Government austerity measures don't necessarily mean that you want to disregard consumption.
2. It's not impossible nor unusual to cut back on certain government services while boosting others.

Not to mention the fact that they're useful in different cases. Keynesianism isn't advisable when the economy is largely healthy but the state is armpit-deep in debt, nor is austerity when it's the other way around.

[Werewolfviking]

I think the Kenyesian method is the best as if you shink your economy too much it maybe very hard to get back where you were in the first place. I think it is also important that you boast key areas that increase the long run aggregate supply curve like increase money going to education as this can make sure your economy will keep growing in the future without the fear of retracting a few years down the line.

[Nikitn]

The only way for carrying out austerity while at the same time actively trying to help private consumption, is through expansionary monetary policies like quantitative easing. Those are largely inefficient in increasing consumption by themselves.

Not to mention the fact that they're useful in different cases. Keynesianism isn't advisable when the economy is largely healthy but the state is armpit-deep in debt, nor is austerity when it's the other way around

What "largely healthy"? none of the Southern EU economies in trouble are largely healthy. So how is this relevant?

[Dr. Croccer]

What "largely healthy"? none of the Southern EU economies in trouble are largely healthy. So how is this relevant?

Southern Europe isn't the only region currently dealing with a crisis. Austerity works well for most of Europe, though not the south for more complicated reasons. Keynesianism isn't going to fix their problems either.

[Thorn777]

Plz at least read a wiki on Keynesianism before confusing the neo-Keynesian revisionism, with that original one saving capitalism from itself.

Keynes would spin in his grave if he could see whats called Keynesian today. But whats new. Let people think there is only two hard choices: spending vs austerity. Have the debate there...

Even the crackpot Austrian ideas get more airtime...oh why would that be...

[Nikitn]

True enough, countries like Greece or Spain don't have any choice other than austerity if they wish to remain in the Euro. But what choice does, say, Japan have other than spending (keep running a budget deficit) or austerity (cut down on the deficit)?

[Claudius Gothicus]

Yeah they are not mutually exclusive, a Rational State Bureaucracy that recycles and spends as much as it's needed to keep everything working could be called ''austerity'' while on times of great economic depression stimulating demand and temporally assuming job-creating functions is as necessary as keeping it efficient when things are going well.

[Nikitn]

Southern Europe isn't the only region currently dealing with a crisis. Austerity works well for most of Europe, though not the south for more complicated reasons. Keynesianism isn't going to fix their problems either.

For a given South European country, let's say Greece:

1) Government spending cuts are stopped and the government is allowed to run a heavy deficit. It does this by carrying out light economic reforms while spending money to create jobs and try to keep private consumption steady.
2) The result of 1) is that the Greek GDP stabilizes and stops decreasing.
3) After the economical situation is stabilized, Greece starts to steadily cut spending until the deficit is gone. After that it starts running a surplus.

However, this process might take a very long time compared to austerity, and is dependant on a long time of stability.

There is also the problem of 3). When Greek politicians won't have an immideate crisis on their hands, why would they stop spending or carry out unpopular reforms? Buying votes by running a deficit will buy the politicians in charge power and wealth, and by the time the day of reckoning comes they will be retired on a Caribbean island. So why should they care? I personally think that this problem can be solved by forcing the Greek state to sign contracts, and letting Germany bully Greece if Greece doesn't stick to its obligations.

Yeah they are not mutually exclusive, a Rational State Bureaucracy that recycles and spends as much as it's needed to keep everything working could be called ''austerity'' while on times of great economic depression stimulating demand and temporally assuming job-creating functions is as necessary as keeping it efficient when things are going well.

That's Keynesianism. Spend little in good times, spend much in bad times.

[ShockBlast]

That's Keynesianism. Spend little in good times, spend much in bad times.

Well Nikitn then you answered your own question.

We`ve spent like crazy in good times so there is no money left to stimulate the economy in bad times.

[King Gambrinus]

The Austrian Economists will tear your head off for not presenting their third option...

[Col. Tartleton]

"Austerity" aka Government Austerity will introduce more money into the market than government spending by the virtue of not spending it through government channels. Growth is highest when government shrinks its non military spending. Of course military spending must come through the government, so increased military spending up to a point (and when striving for maximum bang for the buck) is good for the economy because it creates jobs in industries that only exist to service the needs of government.

Keynesian strategies are absurd and government austerity = reducing government decadence.

Organizations which don't produce profit and actual find ways to lose wealth due to overpaying for services to be done should be minimized, not increased to promote economic growth.

Keynes is basically trying a hair of the dog to cure his alcoholism's hangover. However eventually your liver is going to fail...

Federal Spending should be like 3% of GDP, not 24%.

[Dr. Croccer]

"Austerity" aka Government Austerity will introduce more money into the market than government spending by the virtue of not spending it through government channels. Growth is highest when government shrinks its non military spending. Of course military spending must come through the government, so increased military spending up to a point (and when striving for maximum bang for the buck) is good for the economy because it creates jobs in industries that only exist to service the needs of government.

This is basically Reaganomics. You know, the economic policy that didn't work out that well in the long term and resulted in a doubling of national debt. You can't deprive the state of much of its income and then expect it to spend more or just even the same amount it did before without lending. You can't pay for things with money you don't have, it isn't rocket science.

[Enemy of the State]

Of course military spending must come through the government, so increased military spending up to a point (and when striving for maximum bang for the buck) is good for the economy because it creates jobs in industries that only exist to service the needs of government.

So you merely disagree with the ends of Keynesians, but not the means? This is even more despicable. At least other Keynesians want to spend on things that don't involve killing people.

Economic recessions are the inevitable result of cheap credit driven booms. Recessions are great, it means the capital structure is being corrected. Lets let it happen as quickly as possible.

[Col. Tartleton]

This is basically Reaganomics. You know, the economic policy that didn't work out that well in the long term and resulted in a doubling of national debt. You can't deprive the state of much of its income and then expect it to spend more or just even the same amount it did before without lending. You can't pay for things with money you don't have, it isn't rocket science.

I think I said "within reason" as in the government should be limited to the defense of our rights and thus the spending on that will be job creating by the virtue that those jobs (military-industrial/law and order) do not exist outside of military/police spending. I didn't say you should be spending a large deficit.

I'm talking about Reaganomics without large military spending. Although I think defense and defense related infrastructure spending should be the majority of the federal budget. The general principle of the Ibn Khaldun Tax vs Growth relationship is that lower taxes leave more money in the hands of consumers, more money for entrepreneurs to expand or improve their businesses, and more money in the banks which will generate increasing income to the government which in my opinion does not need to be very broad in it's duties, instead it ought to be very effective at a few tasks.

If you cut the taxes on businesses the businesses will have more money. If you cut taxes on the consumer they'll have more money to spend. More money to spend means more consumption which creates demand and more money on the supply side will mean they can grow to meet the demand. More transactions fundamentally means more profit which means more growth. So in theory the larger the number of profitable transactions the larger the net profit, the larger the pie grows. At which point the small slice taken by government will grow relative to the pie meaning that government will not run out of money as long as it sticks to it's diet.

[Squiggle]

This is basically Reaganomics. You know, the economic policy that didn't work out that well in the long term and resulted in a doubling of national debt. You can't deprive the state of much of its income and then expect it to spend more or just even the same amount it did before without lending. You can't pay for things with money you don't have, it isn't rocket science.

Reaganomics if there is such a thing, is cutting taxes to increase revenue to a certain extent. That greater cut to revenue was intentional, he called it starving the beast. Looks like it will work out, just took a bit longer than expected...

[Dr. Croccer]

Reaganomics if there is such a thing, is cutting taxes to increase revenue to a certain extent.

And spending huge amounts on the military. So basically decreasing state income and increasing outcome and hoping for the best. Basically it's how the Greek economy has worked for the past few decades.

That greater cut to revenue was intentional, he called it starving the beast.

Most people would call it fiscal irresponsibility and racking up huge amounts of debt, as it has indeed been called quite a lot.

Looks like it will work out, just took a bit longer than expected...

Austerity is what the US needs, really. And that means *actual* austerity, which means not wasting huge amounts of money for the sake of popular support, either in the form of tax cuts or welfare. It doubt it'd happen though, considering the level of populism American politics are submerged in, so every new candidate is going to have to promise free money to the people in one form or another. Both the Republicans and Democrats are just telling their respective electorates what they want to hear, regardless of how divorced to economic reality it is. And any sensible policies will of course take ages to get working and always in a crappy, cut down form, because the parties will always resist eachother at every chance they get.

[I WUB PUGS]

Austerity is what the US needs, really. And that means *actual* austerity, which means not wasting huge amounts of money for the sake of popular support, either in the form of tax cuts or welfare. It doubt it'd happen though, considering the level of populism American politics are submerged in, so every new candidate is going to have to promise free money to the people in one form or another. Both the Republicans and Democrats are just telling their respective electorates what they want to hear, regardless of how divorced to economic reality it is. And any sensible policies will of course take ages to get working and always in a crappy, cut down form, because the parties will always resist eachother at every chance they get.

Mmmmmmmhmmmmmmm

I didn't know Reaganomics was able to carry through 3 recessions, 3 wars, 2 apparently socialist Democratic Presidents, and 1 insanely spend-happy Republican one.

I'm sure the Gipper was intending for his cuts and spending to only really affect the American people in what 2020? I call BS.

Reaganomics were a failure and everyone was hurting unless you were a Real Estate mogul in Miami or a drug dealer, a Wall Streeter or affiliated with the Defense Industry. Thankfully my father was a high paid engineer for Red Stone and then Rockwell during the Reagan years................yep we did pretty darn well in the 80's.