Carter wrote:Okay.. I get the principle of Keynes..
but if I follow your train of thought.. Greece, Spain, Italy, Ireland etc should be borrowing more, lowering taxes at both end of the spectrum... increasing spending to stimulate the economy and generally pump priming the economy ....
if the principle works for America.. then why would it not work for them ??
and why do other countries ie France, want to tax the rich at 75% or where I am working at the moment... Sweden, taxation for approx 40% of people is in excess of 65% income tax...
Why are these countries getting it so wrong to want to reduce public expenditure and increase revenue from taxation.. and yet there appears to be no policy to reduce the American debt and Chinese capital investment continues flooding into the country which hides the fact.... taking the household analogy.. they now own the house you are in living in and simply paying rent on, as you will never pay off any capital with the current policies in place
Well... there are quite a few people with impressive academic reputations and convincing arguments saying that Europe is indeed 'getting it all wrong', that the general European approach (significant spending cuts and tax-raises) is the wrong approach. There is no consensus about it, but get the impression that the majority of well-respected economists specializing in this sort of thing tend to lean in that direction. They argue that the crisis in Europe isn't a debt crisis of governments, but a debt crisis of private institutions (banks etc.). That is certainly where it all started, with governments having to step in because those ran into problems.
So, in a sense, it is a bit odd that the European governments, stepping in to solve the problems of the private sector are now forced to tighten things up, under pressure from certain elements of the private sector (like those wonderful credit rating agencies that were at the front row of those heading us into the crisis) about the debts they have to that same private sector, the banks and such (after all, it is mostly banks and such that own & trade government bonds etc.).
A lot of these economists (along with Americans like, say, President Obama) have been arguing that Europe should not go for austerity meassures like they have been doing. That the public sector should be EASING things when there is TIGHTENING in the private sector.
However... the problem is that this may simply not be possible. America pretty sure to pay it's debt. It has all the instruments to make sure it can. It can even print money (or do quantitative easing, etc.). Mass capital flight from the USA isn't possible. And the same may be true for Europe. But only in theory.
In practice, Europe has lots of internal rules about what it's shared financial institutions can do, rules that were set up to be 'conservative', focussed on fighting inflation, on tightening things when things go bad, not on easing them, on stopping countries like France from getting all left-wingy and pursuing Keynesian policies. As leftish as many elements of the EU are, the financial setup is actually quite 'monetarist' and not at all 'keynesian'. Odd, but true.
And for the EU to act more 'keynesian', it not only has to surmount those problems, it also has to get everyone to agree (especially countries that are in stronger economical positions, like Germany). And because the principle behind Keynesian macro economics are counter-intuitive, voters don't typically like that, especially not when this seems to be about the rich countries of Europe having to bail out the poor ones. If Europe was 'one nation under God' in the eyes of it's citizens, that might be easier, but, clearly, whatever confused Eurocrats fighting for a European 'constitution' and 'president' may think, it is anything but that.
So... it would be up to individual European countries to pursue a Keynesian path on their own. But they can't do that. Because they are borrowing money from the private sector as individual countries, not as the EU. And because they have the Euro (well, most of them), they can be faced with massive capital flight. They may have a single currency, but when it comes to debt, they still compete with each other. Banks with government bonds can move that capital around, no longer offering it to, say, Spain or Portugal, but offering it for zero interest to Germany instead. The EU single currency system was fundamentally flawed from the start. That much has been made clear, by now.
Some argue that Europe should quickly transform itself into a political entity that CAN and DOES act like single economic actor, so that Austerity does not have to be the only choice when a crisis hits, so that the fact that capital can flow freely through a monitary union won't risk crippling individual countries. I am not sure myself. Maybe it is inevitable, and maybe Europe giving up democracy (rule by the people) up (because you cannot say that a place is ruled by the people when there is no 'the people' and there is 'the people' if 'the people' don't see themselves as 'the people') is the only way to go in the name of economic prosperity (seems like a high price to pay for that single currency, in hindsight, but ah well). Maybe not.
But that is beside the point. The answer to your question of why Europe doesn't do it if it is the right thing is: they simply can't. Some right wing parties don't want to (just as in the 30s, there are always lots of politicians that prefer to follow their fiscally conservative intuitions, even if they are wrong) and others may want to, but they just aren't in a position to do things differently, as individual countries.
And as for China... China WANTS the USA to stay on the Keynesian path. Just as Germany wanted Greece to keep importing German products for many years, which is partially why they were willing to overlook the mess of the Greek state finances and let them into the EU... China wants the USA to 'do well', so they will keep buying the stuff China makes. Because China's own consumer market is certainly not going to cut it, not going to be enough to sustain their double digit growth numbers. China has to keep pumping money into the rest of the world, to keep their own currency down, their own wages low, so they can keep reaping the benefits of the market imbalance, on the unfair trade and labor cost advantages.
In short: Europe has no real alternative but austerity. The USA has.