Monday, December 03, 2012  The Myth of Austerity, by Philip
Bagus  Guest post by Philip Bagus  Many politicians and
commentators such as Paul Krugman claim that Europe's problem is
austerity, i.e., there is insufficient government spending.    
The common argument goes like this: Due to a reduction of
government spending, there is insufficient demand in the
economy, leading to unemployment. The unemployment makes things
even worse as aggregate demand falls even more, causing a fall
in government revenues and an increase in government deficits.
 European governments pressured by Germany (which did not learn
from the supposedly fateful policies of Chancellor Heinrich
Brüning) then reduce government spending even further, lowering
demand by laying off public employees and cutting back on
government transfers. This reduces demand even more in a never
ending downward spiral of misery.     What can be done to break
out of the spiral? The answer given by commentators is simply to
end austerity, and boost governme