Keynesianism Is The New Black Death

Keynesianism may wipe out a third of Europe’s GDP

By Louis Woodhill

One election at a time, voters in Europe are tossing out politicians associated with “austerity”.  This week, it was national elections in France and Greece, and state elections in part of Germany.  Nicolas Sarkozy became the eighth leader of a eurozone member country to lose his job in a little over a year.

The voters of Spain, Greece, France, etc., understand that their governing elites have pushed their economies into austerity death spirals, and they have been expressing their unhappiness at the ballot box.

Unfortunately for Europe and the world right now, there are no pro-growth candidates and/or parties on the Continent to offer relief from the austerity programs that are grinding their economies to dust.  With no one to vote for, all that European electorates have been able to do is to vote against.  They have sought to register their protest by defeating incumbents.

Europe as a whole is in recession, and Greece, Spain, and Portugal are in depressions.  What are the people supposed to do if the economic chefs on both the political Left and the political Right are offering the same poisonous “austerity” menu?

Fortunately, unlike the last time something like this happened in Europe, there isn’t going to be a war.  Fifty years of ever-expanding welfare states has left the nations of Europe too enfeebled to fight each other.  Today’s worst-case scenario (which is becoming uncomfortably likely in the case of Greece) is an economic collapse, accompanied by a breakdown in law and order.

Is an outright economic collapse really possible?  Sure.  If Greece were to abandon the euro and try to reintroduce the drachma, its economy would implode.  Or, to be more accurate, it would implode all at once.  With its GDP expected to fall by another 5% this year, the Greek economy is already undergoing a slow-motion implosion.

So, what happened in Europe?  The short answer is, “plague”.

The Black Death of the 14^th century was caused by the Yersinia pestis bacterium, which was spread by rats.  Today’s plague is the result of Keynesianism, which is being spread by the economics departments of major universities and The New York Times.  Unfortunately, unlike Yersinia pestis, Keynesianism does not respond to antibiotics.

Austerity, as currently being practiced in Europe, is based upon the Keynesian belief that tax increases and government spending cuts have the same effect upon both the government deficit and the economy.  In fact, the most virulent strains of Keynesianism cause people to believe that raising top marginal tax rates and increasing government spending can actually boost GDP, because “the rich” have a higher “marginal propensity to save” than do the recipients of government handouts.

François Hollande, the winner of Sunday’s election in France, is a Keynesian.  He believes that raising France’s top marginal tax rate to 75% while hiring 60,000 more unionized teachers will make things better.  If they ever make a musical about the French economy, the actor playing Hollande will be wearing a dress and ruby slippers and wistfully singing, “Somewhere Over the Laffer Curve”.

To a leader whose mind is infected by Keynesianism, it makes sense to try to close a budget deficit with a combination of tax increases and spending cuts, with the balance between them determined by some combination of political considerations and “fairness”.

Even so-called “conservatives”, like Spain’s Mariano Rajoy, have succumbed to Keynesianism and raised top marginal tax rates.  After only a few months of Rajoy’s austerity, Spain’s unemployment rate has risen to 24.4%—52% for adults under 25.

There is nothing that explodes a government deficit faster than falling GDP.  So, in European country after European country, tax increases have produced rising deficits and debt-to-GDP ratios.

As damaging as tax increases are to an economy, monetary depredation is worse.

Only a Keynesian could think that replacing the euro with a new drachma could be a solution for Greece.  The result would be a new currency backed by the full faith and credit of a government in which no one has faith and to which no one will extend credit.

In reality, the collapse of the Greek economy would not even wait for the introduction of the new currency.  It would not be possible to keep preparations for a new drachma a secret, and even rumors of such a move would be enough to create a cataclysmic run on the Greek banking system.  Capital, and people with capital, would flee.

If there was anything left of the Greek economy by the time the new drachmas were introduced, the markets would reject the new currency, and it would quickly become worthless.  This would mean that the real revenues of the Greek government, which would be collected in drachmas, would go to zero.  This would not be a pleasant experience for government employees and recipients of social welfare benefits.

In the 1300s, the Black Death killed about a third of Europe’s population.  If its spread is not checked, Keynesianism may wipe out a third of Europe’s GDP.