A New York Times news article asserts that Keynsianism is being ignored in Europe. Instead of stimulating their economies by borrowing and spending or cutting taxes, European governments are tightening their belts. Writing specifically about the looming cuts in Britain, Paul Krugman sees disaster ahead.
On the other hand, European countries have institutionalized Keynsianism (to a degree) by creating social welfare entitlements. When people are entitled to extensive unemployment benefits, as unemployment rises, state spending can soar. In Germany, for example, people who are laid off get between 60 percent and 67 percent of their former income as government benefits, plus health care. Thus I thought that perhaps the current round of budget cutting in Europe was only a course correction after a lot of automatic Keynsian stimulus.
You can measure spending lots of ways, and I ran the numbers for gross government expenditures in nominal dollars and as a percent of GDP. But I decided that the clearest story about governments’ decision-making was the trend in their annual expenditures compared to their own pre-recession baselines. Here is that comparison, based originally on IMF data:
It’s interesting that the US has had the largest stimulus, despite our relatively weak policies for automatically raising entitlement spending in recessions, and despite our alleged resistance to government. The stimulus began under Bush and actually leveled off under Obama. Likewise, Britain has more modest social welfare policies than those in Germany and France, yet British spending has increased more than theirs. As we look forward, the spending line is likely to flatten out in the US but decline in Britain.