Keynesian policies to support aggregate demand make sense at a European level, but much less so in a country like Italy that has a high public debt. The markets would not let us do it and they would not all be wrong because, regardless of the credibility of those who govern, Keynesian policies have well-known limitations. These limits exist regardless of the "external" criticisms that can be made of the Keynesian model, in the sense that they emerge precisely using the assumptions of the Keynesian model, starting with the one that GDP is determined by aggregate demand in conditions of generalized underutilization of resources. In summary: 1) a deficit does not lead to economic growth and 2) an increase in the deficit cannot generate an increase in GDP such as to reduce the debt/GDP ratio except in the short term; in the long run the debt is reduced only with appropriate primary surpluses.
A is simulated “permanent” increase in public spending starting from a state of stable underemployment in which the initial levels of debt and GDP are set equal to 100. Initially taxes are such as to keep the budget in balance. In period t=3, after years of stagnation, Keynesian economists prevail and public spending is increased by, say, 10% of GDP. As a result of an assumedly generous multiplier, GDP increases by almost 20% in the first two years. In the third year after the shock, GDP falls slightly due to the lagged effect of the tax increase that it itself generated and then stabilizes at a higher level than in the baseline scenario, but it no longer grows. Debt/GDP, on the other hand, grows without limits because the increase in revenue cannot be such as to exceed the higher expenditure (and if it were, GDP would return to its starting point).
Seeing the debt grow, the government becomes alarmed and reacts by bringing spending back exactly to the level it was at the beginning. As can be seen, this generates an immediate recession: GDP falls below the initial level for a couple of years and then stabilizes at 100. Debt, which was already on a growth trajectory, registers an initial jump upwards ( typically associated with austerity) and then continues to grow due to higher interest charges and the so-called snowball effect. This means that to stabilize the debt it is necessary to bring the primary surplus to a higher level than the initial one.
Here then what the markets care about. A higher deficit boosts economic activity in the immediate term, but at the cost of a future recession and an increase in Italy's already very high debt burden. It may be true that austerity generates an increase in the debt-to-GDP ratio in the short run. But easy finance increases debt/GDP in the long run and is unsustainable. A thousand qualifications can be made to this deliberately over-simplified logical scheme. In particular, public or private investments can be included with super virtuous effects on production potential. But it is almost impossible to imagine realistic conditions in which what many seem to dream of happens: making more deficits today without paying the bill tomorrow. Investment is of course essential, but in conjunction with structural reforms and aimed at improving factor productivity.
