Most Americans have no idea what the term “Keynesian economics” means, but the truth is that it has been deeply influencing U.S. economic policy for decades. Essentially, it is an economic theory that originated with a 20th century British economist named John Maynard Keynes, and it advocates government intervention in the economy in order to smooth out economic cycles. The general idea was that lower interest rates and increased government spending could be used to increase aggregate demand when the economy was experiencing a downturn, thus increasing economic activity and reducing unemployment.
And you know what?
To a certain degree, Keynesian economic theory actually does work.
Increased government spending DOES stimulate the economy.
But the problem is that governments all over the world decided that they would just run constant budget deficits and stimulate the economy all the time.
All of this debt has brought a temporary prosperity to many of the nations around the globe, but there is one huge problem with debt.
It has to be paid back eventually.
So what happens when nations have to start spending huge chunks of their national budgets just to service all the debt that they have piled up?
Well, that is when they taste the bitter side of Keynesian economics.
In fact, we see that starting to happen all over the world right now.
All of a sudden, governments all over the globe are talking about huge budget cuts, pay decreases, and higher taxes.
We all know about what is going on in Greece right now, but suddenly it seems like “austerity measures” are being implemented all over the place. Just consider the following examples….
*Portugal has pledged to impose fresh austerity measures that include much higher taxes and dramatic budget cuts.
*Barack Obama is personally pressuring Spain to make severe austerity cuts.
*It’s not just Southern Europe that is facing these austerity measures either. It is being reported that Germans are bracing themselves for a “bitter” round of budget cuts.
*The exploding debt situation in the U.K.was a major issue in the most recent election. Bank of England governor Mervyn King has even gone so far as to warn that public anger over the “austerity measures” that soon must be implemented in the U.K. will be so painful that whichever party is seen as responsible will be out of power for a generation.
*Federal Reserve Chairman Ben Bernanke says that United States citizens will soon have to make difficult choices between higher taxes and reduced government spending.
*California Governor Arnold Schwarzenegger is reportedly planning to seek “terrible cuts” to eliminate an $18.6 billion budget deficit facing the most-populous U.S. state through June 2011.
*In fact, many U.S. states are getting ready for their biggest budget cuts in decades.
Austerity measures for everyone?
That is the way it is shaping up.
So what happens when austerity measures are implemented?
Well, just as Keynesian economics correctly predicts that economic growth goes up when government spending increases, it also correctly tells us that economic growth goes down when government spending decreases.
So all of these austerity measures are going to mean economic pain for a whole lot of people.
Not only that, but there are now whispers that this European debt crisis could potentially cause the break up of the euro.
Whether or not that is actually the case, officials in Europe are sure seizing on this crisis to advocate for increased centralization of power in the EU.
For example, senior administrators of the European Union are proposing that they be given unprecedented power to scrutinize the spending plans of member countries before national parliaments can vote on those budgets.
Talk about a loss of sovereignty.
But not only that, the Governor of the Bank of England, Mervyn King, has come right out and said that he believes that the European Union must become a federalized fiscal union if it is to survive.
Doesn’t it seem like whenever there is a crisis the solution that is always being proposed is to give centralized institutions even more power?
There has also been talk that nations such as Greece could end up being ejected from the euro, but the reality is that such a scenario is not very likely.
For one thing, the ECB has already come out and said that under current EU law, ejection of a nation from the monetary union is “legally next to impossible”.
In addition, leaders throughout Europe realize that if the euro fails then the entire EU may fail as well. German Chancellor Angela Merkel made this very clear when she recently warned that if the euro collapses, “then Europe and the idea of European union will fail.”
For many in Europe that would seem like a disaster, but the truth is that it would be a wonderful, wonderful thing if the euro failed.
Because it would represent a major defeat for those who are seeking to drag us towards a “world currency” and a “global government”.
It would also be a huge victory for those who still believe in national sovereignty and the decentralization of economic power.
So let us hope that the euro breaks up.
But don’t count on it.
Meanwhile, the one thing that we can count on is all of the economic pain that all of these new austerity measures are going to bring.