I believe Lorenzo did and excellent job is his essay pointing out the complex fiscal picture in Greece. He does seem to be a bit at odds with Jeff’s comments in his recent post when he writes this:

As Greece is suffering worst, it becomes the focal point of the crisis. But the Greek austerity measures are cutting so deep, some people may end up paying to have a job. As the Melbourne Weekly reports:

Amid deep humiliation and great uncertainty about what it means to be Greek and, more particularly, European, enraged Athenians are lashing out as the weight of five grinding years of recession and the promise of perhaps decades of crippling reform and restructuring crushes the living breath from them.

And the bailout terms are stark:

The conditions insisted upon by Europe and barely delivered on by Athens, include the axing of 150,000 jobs from an 800,000-strong public sector by 2016 and a 22 per cent slice off the minimum wage – in a country in which average wages have dropped 15 per cent since 2009. The retirement age is to be lifted from 58 to 65 and restrictive closed shops that control the professions and services are to be busted.

However, the austere, tight money policy of the European Central Bank (ECB) seems to be the largest factor for the issues in Europe.

I think that the conservative mantra of Keynesian economics is a bit of a red herring. The assumption they impute to Keynes is that he advocated perpetual government spending and debt to stimulate the economy. This is not accurate and a vast oversimplification. I submit these articles as evidence: New York Times, The Concise Encyclopedia of Economics, and AdamSmith.org

I would also like to highlight a quote from this article:

When does the need for deficit spending end?

There’s something else worth pointing out about an analysis that stresses the role of debtors forced into rapid deleveraging. It helps solve a problem Keynes never addressed, namely, when does the need for deficit spending end?

The reason this is relevant is concern about rising public debt. I constantly encounter the argument that our crisis was brought on by too much debt – which is largely my view as well – followed by the insistence that the solution can’t possibly involve even more debt.

Once you think about this argument, however, you realize that it implicitly assumes that debt is debt – that it doesn’t matter who owes the money. Yet that can’t be right; if it were, we wouldn’t have a problem in the first place. After all, the overall level of debt makes no difference to aggregate net worth – one person’s liability is another person’s asset.

It follows that the level of debt matters only if the distribution of net worth matters, if highly indebted players face different constraints from players with low debt. And this means that all debt isn’t created equal – which is why borrowing by some actors now can help cure problems created by excess borrowing by other actors in the past.

Suppose, in particular, that the government can borrow for a while, using the borrowed money to buy useful things like infrastructure. The true social cost of these things will be very low, because the spending will be putting resources that would otherwise be unemployed to work. And government spending will also make it easier for highly indebted players to pay down their debt. If the spending is sufficiently sustained, it can bring the debtors to the point where they’re no longer so severely balance-sheet constrained, and further deficit spending is no longer required to achieve full employment.

Yes, private debt will in part have been replaced by public debt – but the point is that debt will have been shifted away from severely balance-sheet-constrained players, so that the economy’s problems will have been reduced even if the overall level of debt hasn’t fallen.

The bottom line, then, is that the plausible-sounding argument that debt can’t cure debt is just wrong. On the contrary, it can – and the alternative is a prolonged period of economic weakness that actually makes the debt problem harder to resolve.

And it seems to me that thinking explicitly about the role of debt, not just with regard to the usefulness or lack thereof of wage flexibility, but as a key causal factor behind slumps, improves Keynes’s argument. In the long run we are, indeed, all dead, but it’s helpful to have a story about why expansionary fiscal policy need not be maintained forever.

I think it would be more accurate to assert that Keynes was an advocate of stimulus rather than debt, growth rather than austerity. Keynes would prefer the stimulus to come from the private sector but as a witness to the Great Depression he saw that severe austerity leads to severe depression.

From a personal finance point of view austerity makes perfect sense; the less one spends and acquires debt the faster one can quite paying interest and start to save. However, from a macroscopic economic point when the entire economy is austere no one is hiring, the economy is not growing but shutting down. Private debt and public debt increase under severe austerity.

The 5.1 trillion dollars worth of debt attributed directly to Bush as opposed to 983 billion attribute directly to Obama was in large part due to Bush tax cuts and the vast rate of decline of the economy under Bush. When GDP goes down, debt goes up for both the private and the public sector.

One example of this is how the Republican and Democratic decades old food stamp program which was not changed by President Obama went up dramatically due to the Bush recession from the same link just quoted.

Food stamps have been tied to poverty levels for decades. President Obama has nothing to do with the automatic levels that kicked in due to the recession that started in the Bush administration.

Eligibility for food stamps did not change under Obama. More folks qualified for food stamps under the guidelines many Republicans helped to establish. In any case, the food stamp program is clearly an example of how the slowdown in growth of the economy leads to debt.

Republicans have often sided with the idea of government stimulus. Even Bush cut checks during his administration for individuals up to $600 and couples up to $1,200. This is no different of a stimulus that what Obama did with infrastructure. The idea is that the more money that is available and accessible in the economy, the more likely growth will take place. Keynes did not believe in running public debt forever. He thought it was necessary when austerity prevailed on a macroeconomic level since the private sector was incapable of stimulating itself out of its predicament and continued decline would very likely and historically, demonstrably end in severe depression or recession. When the private sector was growing Keynes was conservative and believed in paying down debt contrary to certain popular beliefs about him.

One more point with regard to austerity, the consumer makes up 2/3 of the US economy. Republicans, Bush and chiefly conservative business folks have vigorously advocated consumer spending NOT austerity to stimulate growth. This is clearly evidence that the notion that Keynes had that stimulus, whether public or private, leads to economic growth. When the economy tanks, private debt grows and the economy slows dramatically. Monetary policy has been created to offset and counter the situation and keep it from worsening. You will also find that the idea that inflation increases with public debt is not historically accurate as this article demonstrates:

What anyone who understood Keynes should realize is that as long as output is depressed, there is no reason increased government borrowing need drive rates up; it’s just making use of some of those excess potential savings – and it therefore helps the economy recover. To be sure, sufficiently large government borrowing could use up all the excess savings, and push rates up – but to do that the government borrowing would have to be large enough to restore full employment!

Keynes would be the idiot Republican’s think he is if what they were parroting was accurate of his thought: eternal, increasing debt whether private or public is the death of a vibrant economy but so is eternal austerity. As is almost always the case, the devil is in the details – oversimplification may make for good emotive politics but tends toward perpetuating mistakes of the past and endlessly repeating histories that we once learned from.