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Keynes as Leftist Radical

DiA looks at something that's interested me about contemporary European politics. Although the center of gravity of European politics is in general far to the left of the USA's, so that Obama would be considered a mainstream European conservative, there is one exception: fiscal austerity. The notion that the government should engage in deficit spending to increase demand during recessions, which is mainstream center-left Keynesianism in the U.S., is now considered so radical in Europe that only far-left parties endorse it:

The idea that cutting the government's budget deficit is a prerequisite for economic growth is dominant in northern European politics, not just on the right, but on all but the farthest reaches of the left too. ...[C]entre-left parties in Germany and the Netherlands believe it's imperative to slash their countries' budget deficits in the face of the worsening European recession.

Take Germany. As Wolfgang Münchau writes in the Financial Times, the German Social Democratic Party (SPD) "keeps criticising Angela Merkel’s policies on the eurozone, but ends up supporting whatever policies she drags before the Bundestag."

What is most infuriating is the SPD’s sheer inability to explain in a clear way why the chancellor is wrong. The reason for this inability is that the party has bought into the same panoply of false crisis narratives. It bought into the lie about fiscal profligacy as the cause of the crisis, and the need for austerity to solve it... Whenever the Social Democrats get infected by the need to feel responsible, they end up with the wrong policies. The SPD supported financial deregulation in the late 1990s. The SPD supported fiscal austerity. It supported a constitutional debt brake. If you add it all up, the SPD supports economic policies that have ultimately given rise to the imbalances that have driven the eurozone apart.

This is very similar to the situation in the Netherlands, where the centre-left Labour party has just joined the governing coalition and embraced the doctrine of austerity and deficit-cutting with gusto. During the electoral campaign, Labour nodded imperceptibly towards a Keynesian take on the euro-zone crisis, protesting the EU-mandated deficit limit of 3% of GDP as a senselessly rigid measure that would "cut the economy to pieces". But they then signed on to a governing accord that immediately slashes the deficit by nearly 2% of GDP through tax hikes and budget cuts. Since the new cabinet took office last month, Labour ministers and MPs have been referring constantly to the party's tradition of sober fiscal rectitude going back to the 1940s, to allay any suspicion that they might be softies or pinkos; they ridicule calls for stimulus, and hammer on the moral-hazard dangers of official writedowns or haircuts on Greek debt, lest the Greeks abandon promised reforms and other European debtor nations clamour for the same deal. Labour's acquiescence to austerity policies has held even as the Dutch economy shrank a startling 1.1% in the third quarter. The party confines its leftist impulses mainly to spreading the domestic pain of austerity in a more egalitarian fashion, through progressive taxation and redistribution measures; on euro-zone policies, they've eliminated any daylight between themselves and the centre-right Liberals.

That solidarity bodes well for the stability of the current government and its ability to carry out dramatic reforms. But if you're looking for anyone in the Netherlands' political spectrum who takes a real anti-austerity line, you have to look all the way to the far-left Socialists (as in Germany, where as Mr Münchau writes, the only intellectual opposition to Ms Merkel's economic views comes from "the post-communist left"). Interestingly, it's not that there is no support for neo-Keynesian views among Dutch economists. In fact, many of the senior economists at Dutch banks, and of the academic economists who appear as pundits on Dutch TV, agree that the austerity policies are overly harsh, irrelevant to the crisis, or actively pernicious. Yet this point of view completely fails to penetrate the governing consensus.

The 'governing consensus' strikes again! In a mysterious process, certain ideas rapidly become de rigueur for educated elites, and dissent is not so much quelled as ignored.


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Just a quick reminder that Keynesianism implies paying back the debts you made in times of recession during times of boom.


Actually, there are a few Keynesian economists in Germany, but they have been marginalized during the last 20-30 years. Among the "Wirtschaftsweisen" only Bofinger is a Keynesian, but also Gustav Horn (of the labor union's Hans-Böckler-Foundation) and Heiner Flassbeck (co-worker of Lafontaine during the latters brief spell as minister of finance and now with UNCTAD in Geneva).
Unfortunately, the government is hardly influenced by these dissenting voices.

But despite the austerity claims NOW (especially for southern Europe) the (CDU/SPD) German government employed certain Keynesian measures when the crisis struck four years ago, namely the Abwrackprämie as incentive to buy new cars and the support of temporary part time work (Kurzarbeit) to avoid a rise in unemployment.

From the New Yorker about the failure of the austerity measures in Britain


Junger Gott

Well, it's not like Europe had never embraced Keynesian deficit spending. It was basically the answer for the economic crises of the late 60's and early 70's.

However, that's also when politicians and economists alike discovered a major flaw: There is no really exit strategy as it is often not that clear when an economic downturn is officially over and the spending can be turned off again. And even if you do, taking money away you'd been giving out before will often become next to politically impossible. These experiences is what seems to make many people in nations where they have gone Keynesian before a bit weary.

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