A Pupil’s Question to a Government Minister to Help Him Answer a Possible Exam Question

29 March 2013

Alexander Kokolakis is a pupil in Crete who, like many young people, is currently studying for exams .

One of his subjects of study is Economic Theory, and he has felt so perplexed by what he had read in the course text book that he thought that he should write and seek the advice of the Greek Government’s Minister of Finance, Yannis Stournaras .

Greece, as we know, in ancient times was called the birthplace of democracy , but today it is better known as a major victim of austerity policies, with an unemployment rate of almost 60 per cent amongst young adults.

Alexander wrote to the Finance Minister  telling him that the course text book says that when “ the economy is in recession and unemployment is high” then government should increase its public spending to boost the economy and economy “ to emerge from the recession” .

This is deficit spending, the traditional approach advocated by Keynes.

Alexander challenged the Finance Minister, asking, “ What do you do, Mr. Minister? Exactly the opposite.”

Alexander says that the Greek Government puts higher taxes on  low-income families, with no success, and instead, many more are dragged down by the effects of the recession.

He goes on to describe what these government policies are doing – they “shred the dreams of thousands of young people (like my own at this point) forcing them to migrate abroad for a better future.

"High-climbing  unemployment rates  decrease the quality of life and the political system takes no responsibility for the situation that is of its own making.”

Alexander then puts the Finance Minister on the spot with this question :

If, in my upcoming exams, I am asked what policy applies during times of recession, what should I write as the correct answer?

“That we must have a budget surplus with increased taxes and decreased benefits, as you practice, or a deficit, which is what the book says is needed since we must increase spending and income to get out of the recession? “

He awaits a reply from the Minister

The book‘s answer is, of course, correct.  

Austerity programmes were imposed on Greece and have inflicted  enormous damage to its economy and to the everyday life of its people.

The same applies to its application elsewhere.

Its justification is drawn on the analogy between cutting back spending in the budget of an individual family and cutting back spending in the budget of an entire country.

This is, and always has been, a misleading analogy.

If everyone cuts spending significantly , then the economy is weakened still further which prolongs the misery further as one  person’s income from a job depends upon the purchases of goods and services made by other people.

National government has different responsibilities than administering a household budget because changes in government spending affect the economy of the entire population and not just one household.

This is John Maynard Keynes’ well-known Paradox of Thrift.

Keynes taught that in times of economic downturn, governments had an obligation to intervene to restore the economy to its rightful state by spending money to boost economic activity.

The schoolboy Alexander Kokolakis will no doubt have read about The Paradox of Thrift in his course book.

His question to the Greek Finance Minister raises another question.

 “If Chancellor George Osborne received a similar letter from a school pupil, how would he reply?”

 (With thanks to the Daily Kos where details of the letter first appeared, and to Google Translate)


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