Keynes recognised that, when an economy goes into recession, leading to falling government revenues through a falling tax take, but a rise in expenditure through increased welfare payments, then the obvious solution, to try to balance the government's books by raising taxes and cutting expenditure and so imposing austerity, is the wrong one.
The counter-intuitive solution, to re-stimulate the economy by cutting taxes and increasing government expenditure, is the correct solutions. In shorthand: "Look after the economy and the deficit will take care of itself."
The experience of the 1930s (and in the US in the 2010s!) proves Keynes correct on both counts. Astonishingly, in the EU and the UK, politicians have ignored the lessons of history, reverted to pre-Keynesian orthodoxy and caused misery for millions, most tragically in Greece.
Whatever the result of the Greek elections this weekend, the situation presents a marvellous opportunity for a controlled experiment which will (once again) prove Keynes right. In outline, this experiment would:
- "Ring-fence" the Greek government's current debt mountain, and give them a moratorium on interest payments for, say, five years:
- Facilitate further borrowing by the Greek government at market rates of interest to finance infrastructure investment, employment creation and generous welfare payments .
I claim no expertise on the Greek economy but, from hearsay, understand that their citizens, and not just the very rich ones, have developed tax evasion and avoidance to a fine art, and that their civil servants have organised a prolonged feather-bedded retirement beyond the wildest dreams of most of the rest of Europe.. The five year breathing space would give the government the chance to sort out these and any other deep-seated problems.
If the experiment succeeds, then not only will tens of thousands of young Greek lives be rescued from resentful dejection and disillusionment, but the EU will have the advantage of a vibrant and healthy economy, able to work in equal partnership with the rest of us, and able to pay off the debts of its somewhat feckless past.
Given that Greece forms only some 2% of the economy of the EU, the experiment is worth the unlikely risk of failure.