A central argument of Paul Krugman's book, End This Depression Now, is that calls for the imposition of austerity by heavily indebted governments are based on the mistaken belief that governments and individuals must respond to indebtedness in the same way. This is the fallacy of composition, the belief that what is true of individuals is necessarily true of the class to which those individual belong. To say that atoms are colorless, cats are made of atoms, therefore cats are colorless, is an example of such fallacious reasoning. [Actually, atoms are not colorless, they're just too small to see.]
Refuting such logic, Keynsians point out that, unlike individuals, governments may in some circumstances improve their finances through increased expenditure. If, for example, a government increases expenditure during a period of high unemployment in such a way as to stimulate investment, unused labor and capital will be re-employed, thereby generating increased output and tax revenue. [Actually, this is no less true of individuals or households. If you get a bank loan, invest in a truck and a ladder and spend the weekends cleaning gutters and washing windows, then you may improve your household budget.]
But to suggest that boosting the government deficit in Greece, for example, would be a solution to the government's insolvency is utterly daft. The Greek government, to name one of many governments in a similar situation, has bankrupted itself by over-investing in the public sector while failing to make taxpayers shoulder the full cost of the services -- many of doubtful value -- thus provided. Any arrangement to enable corrupt politicians, Greek or otherwise, to continue buying votes by overpaying and over-staffing the bureaucracy will only worsen a country's financial difficulties.
In any case, the problem for Greece and most other Western nations is not that there is a need for a wee bit more investment in productive sectors of the economy. The problem is that the West has been priced out of too many markets by four billion Third Worlders working for pennies an hour. The solution to that problem is either to give everyone in the West a 60 to 80% pay cut or to return to a closed market protected by tariffs. In the meantime, it would be a good idea to stop importing Third Worlders to the West to take what job opportunities exist from the least competent section of the Western work force.
Of the alternatives, tariffs and a return to protectionism are totally unacceptable to the Bilderbergers and others of the monied interest who dictate the course of affairs. Cutting wages sharply, immediately and across the board, though a perfectly effective solution, presents certain political difficulties. So we appear to be in for a long grinding down of expectations in the West. But give it a generation or so, and we may be as willing as the Chinese to work 12 hours a day, seven days a week for three hundred bucks a month.
By that time, unfortunately, much of our workforce will be essentially without skills due to years of enforced idleness. By then it will be the formerly low-wage, Third World nations that will have the industrial workforce skills, the technology and the capital to dominate the high-wage manufacturing sector of the World economy.
So although our economic problem is not theoretically insoluble, it is effectively insoluble because of the self-serving control of the plutocratic elite and the pathetically blinkered vision of the elite-owned economists at the Ivy League universities and elsewhere who are, with few exceptions, incapable of articulating novel solutions to novel problems.
The West is being beaten at its own game. The West achieved the first the industrial revolution and profited mightily from it. The Rest have now launched their own industrial revolution and are eating our lunch. The Western nations have gone from a position of overwhelming competitive superiority into a competitive decline that is accelerating because the leadership will neither acknowledge, nor deal with, what is happening.
To restore competitiveness we need austerity throughout the public sector, meaning wage cuts for public sector workers, and cuts to welfare, healthcare, pensions and education, the money saved to be returned to the private sector through tax cuts. In particular, the corporation tax must go. Higher net profits will mean more investment. The income tax must also be cut to bring offshore wealth home to be taxed -- moderately -- and invested at home.
Then, to make the least skilled of the Western workforce more competitive with workers in the Third World, employers must be provided with wage subsidies. Sold by competitive auction, such subsidies would cost less than welfare and the other costs associated with unemployment, including the costs of increased crime increased policing and an increased prison population.
The number of subsidies offered would be adjusted to achieve full employment. That way, Western workers would be available once again make to shoes and shirts and car parts for one another at a competitive price, rather than living a demoralized or degraded existence on welfare or by crime because the jobs that should be theirs by right have been outsourced to the Third World.
Canspeccy: State-Financed Capitalism and the End of Western Hegemony