As a public debate over austerity in the Eurozone and the US continues a significant side of the debate continues to assert that what is needed is Keynesian economics 101. Another side of the debate, which isn't really paid attention to beyond lip-service, argues that all we have had for the past 60+ years is Keynesian policies and the legacy of which is what we must confront now. The democratic states of the west since WWII have simply oscilated between liberal Keynesianism and conservative Keynesianism, and we have never moved in the actually implementation of public policy into an "After Keynesian macroeconomics" world, let alone returned to the more orthodox teachings of pre-Keynesian macroeconomics. Instead, we have lived in an age of "economic illusion" where common sense economics was denied, and governments used the tools of monetary and fiscal policy to distort market signals, disrupt the coordination of economic plans, and deceive an unorganized and ill-informed public.
The reason why the situation isn't worse is because of the great gains achieved during that 60+ year period due to technological innovations, and the opening up of trading opportunities throughout the globe. As Adam Smith argued long ago, the power of self interest enables a market economy to overcome any number of impertinent obstructions that human folly may thrust upon it. But a market cannot overcome an infinite number of obstructions; there is a tipping point. There also is a question of arithmetic -- which is very often unpleasant for current generation polticians as they strive to spend more, and pass the payment to others. Sooner or later the bill comes due, and in the case of many public expenditures there is no connection whatsoever to "investment" that paid off through time. Instead, the fiscal commons just produced an overspending in the "here and now" and a promise to pay a "big bill" down the road. That big bill has accumulated over those 60+ years, and policy makers now the Eurozone and the US are grappling with that reality. Like their predecessors, they would like nothing better than a justification to send this bill down the road to future generations so they can continue to spend.
Unless we as economists, economic policy makers, and the interested layman focus our intellectual attention on the political and economic consequences of Keynesianism we will not make progress. The problem goes to the root of the Keynesian prescription in macroeconomic policy, and further in macroeconomic thinking in general. But the debate among economist about public policy focuses primarily of late on the effectiveness of austerity. Robert Skildelsky has challenged the austerity arguments and calls for a Keynesian solution to be followed which will boast aggregate demand and relieve the Eurozone and the US from its current state of an "unemployment equilibrium". He claims that the current policy path of fiscal austerity measures has produced a predictable failure. Ken Rogoff argues that while there is no magic Keynesian bullet to fix the problem, inflation may be the key (or at least the lesser of evils). He repeats that he is not an advocate of extreme austerity measures.
In debating these issues, one should start with examining what we know from natural experiments with austerity and whether tax increases or spending cuts are more effective at getting the economy back on track. In a study for Mercatus, Veronique deRugy and Alberto Alesina argue that spending cuts and more competitive environment is the key to regaining fiscal responsibility and generating renewed economic growth.
Since 2008, I have been arguing that for economists wanting to comment on our contemporary problems the best places to start are Buchanan and Wagner's Democracy in Deficit, and Hayek's A Tiger By The Tail. Critical to that reading, is to ultimately see the connection between the two and the deficit, debt, debasement cycle that Keynesian policies have unleashed throughout the democratic west. Governments, ancient as well as modern, Adam Smith told us want to engage in this juggling trick of deficit spending, accumulating public debt, and then debasing the currency to pay the debts off cheaply. The task was to constrain the juggling as such a policy leads to the ruin of nations and in some instances the collapse of civilization. Orthodox economics from Smith to Hayek taught the dangers of this juggling. Keynes argued we need to embrace the juggling. We haven't stopped juggling ever since.