Question

Explain how countries like Greece have largely misused the Keynesian model to “buy” votes and how this has created “sovereign debt” problems. In this regard, why can countries like Greece, or US states like California and cities like Detroit, become bankrupt, but countries like the US and Canada can never be bankrupt from too much debt?

Answer 1

Keynesian model proposed government spending as a way to help economy grow, but the model said that spending should take place in development programs that can generate future income as well. Here, countries like Greece, opted the first part of the model and increased government spending. But, it was did to give cash benefits, and other benefits that could help them buy votes and remain in the government, hence forgetting the second part of the Keynesian model. It created debt to be more than the GDP and sovereign debt problem got created where government was in a position to make the default. It is the reason to say that, Keynesian model is abused and countries like Greece, defaulted.

The states and countries as mentioned can become bankrupt, because these states and nations opted for deficit financing, but never cared for those programs that can bring revenue or income or continuous employment generation for the economy. It made them unable to increase the revenue and made them take more debt and reached to a position of bankruptcy.

In contrast to it, countries like USA and Canada, also opt for the deficit financing, but focus the spending on those programs that can create new jobs and economy starts growing on its own. It helps them to make GDP grows more as the debt grows.  As a result, these nations will never become bankrupt, even if they have huge debt.