Sharing the Burden
At the Keynesian Endpoint, a nation must engage in burden sharing and spread the pain among four groups in particular, as discussed next.
Countries at the Endpoint have no choice but to re-examine and in most cases reduce their entitlement spending, which means cutting pension and health care benefits promised to their citizens. Politically, this is the most challenging element in the burden-sharing imperative, but without it nations at the Endpoint will be unable to put themselves on a sustainable fiscal path. Nations at the Endpoint, particularly those in Europe’s periphery, are likely to see their entitlement policies converge with those of their neighbors; in other words, these nations will use as models for change the policies of their regional trading partners as well as their extended trading partners when proposing changes to their existing social contracts. For example, European countries that currently allow retirees to receive retirement benefits at ages that are below that of nations in relatively better fiscal health will probably raise their retirement ages, although not necessarily to the same level as these healthier nations, at least for while, owing to the large political difficulties of doing so. In addition to cuts in entitlement programs, citizens will likely have to bear the burden of targeted tax increases and other revenue generators, including those gained from consumption taxes and “sin” taxes that attempt to recoup costs associated with the poor habits the sin taxes are placed against. These habits of course include smoking, where associated medical costs are a direct hit to taxpayers. Citizens will likely also be forced to endure a reduction in services. Wise nations will target service cuts in areas where there will be little impact on the health and well-being of their people and that will minimize any impact on education, which is vital to the long-term vitality of a nation.
A nation at the Keynesian Endpoint must allow its currency to depreciate in order to boost its economic growth rate and to attract capital. Those that do can effectively distribute some of their burden onto other nations. Nations that allow their currencies to depreciate will grab exports from other nations whose currencies are appreciating against their own, thus resulting in a positive in terms of trade shock. European nations that are part of the European Monetary Union are challenged in this respect because they do not possess the ability to devalue the euro. It is an internal dilemma. These nations will lack offsets to their fiscal austerity programs, rendering their economic growth rates low for a lengthy period of time.
Nations that reach the Keynesian Endpoint will borrow from their monetary brethren, which is to say relatively richer nations within a monetary union will transfer money to their brethren in need. This will boost the debts of the contributing nations. In Europe, this means Germany and France will increase their debt loads in order to save the periphery and keep them in the European Monetary Union. From another perspective, problems in states and cities in the United States will be shared by healthier states and cities.
Via restructuring, investors holding bonds of countries that reach the Keynesian Endpoint will likely be forced to take “haircuts,” or losses, on their bonds. In some cases nations will ask investors to voluntarily agree to roll their debt at terms attractive only from the standpoint being the least worst alternative—bond investors would rather have their bonds redeemed at par at the original maturity date.