According to the great Doctor Gary North, the litmus test of Keynesianism is the attack on austerity. He writes:
Let’s say that you are reading an article on what the Greek government should or should not do. You read that the government’s proposed austerity measures will lead to a reduction of production. This will lower tax revenues. The government-debt-to-GDP ratio will increase. Austerity will therefore not solve Greece’s economic problems.
The article was written by a Keynesian.
In an opinion piece published by The Globe and Mail entitled “Europe must realize austerity doesn’t work,” Pierre Briancon is true to this Keynesian form:
The Greek economy has shrivelled to three quarters of what it was three years ago, before embarking on its successive turnaround-cum-bailout plans. Euro zone governments keep contributing religiously to their own recession by forcing ever higher degrees of pain on their sick economies.
Spain is slashing public spending and wonders why its gross domestic product is shrinking as well. Britain is slowly sinking under the mindless policies of austerity without perspective. Meanwhile, central bankers keep pushing for ever stricter fiscal discipline, under the eternal slogan of ideologues throughout centuries: “There’s no other way.”
First of all, the laughable notion of the unflinching central banker insistent on fiscal discipline makes about as much sense as Betty Crocker advocating hunger strikes.
Meanwhile it is left to the IMF’s economists to state the obvious. The record is clear. Austerity hasn’t worked. There’s little hope it will. Let’s first work on growth. Then we’ll be virtuous.
Austerity simply means less government spending. By “growth,” the author means an elevated GDP statistic brought about by more government spending. Keynesians believe that government spending is a panacea.
The money that government spends comes from a combination of taxation, borrowing and monetary inflation. In order to evaluate the impact of austerity it is necessary to reflect on these sources of government spending.
When less money is confiscated from taxpayers through taxation, private citizens retain more of their wealth. With increased coffers, individuals may then spend the fruits of their labour on additional capital or consumer goods. How does this shrivel the economy?
When less money is borrowed by the government, more money is available to be lent to private citizens instead. Individuals may then use these loans to invest in capital or purchase consumer goods. How does this shrink the economy?
In the insidious case of monetary inflation, money is created out of thin air and then spent by the government. According to John Maynard Keynes, monetary inflation performs the “miracle… of turning a stone into bread.”
But the truth of the matter is that there is no such thing as a free lunch. The phony prosperity of monetary inflation is entirely illusory. You cannot get something for nothing.
Dr. North sums up his Keynesian litmus test as follows:
So, whenever you see a criticism of austerity as fostering recession, you are reading a Keynesian. He may not call himself a Keynesian, but in this case, he is delusional. Only Keynesianism teaches that reduced national government spending (“austerity”) in a nation whose national government spends 40% of its GDP (Greece) will produce a recession.
Keynesian economic pundits advance many fallacious arguments about government spending. Chief among them is the egregious notion that mortgaging your posterity with debt and deficits is somehow “virtuous.”