Dr. Paul Krugman notes the inherent ridiculousness of the oft-repeated cliché about family budgets being similar to government budgets…
And all these conversations followed the same arc: They began with a bad metaphor and ended with the revelation of ulterior motives.
The bad metaphor — which you’ve surely heard many times — equates the debt problems of a national economy with the debt problems of an individual family. A family that has run up too much debt, the story goes, must tighten its belt. So if Britain, as a whole, has run up too much debt — which it has, although it’s mostly private rather than public debt — shouldn’t it do the same? What’s wrong with this comparison?
The answer is that an economy is not like an indebted family. Our debt is mostly money we owe to each other; even more important, our income mostly comes from selling things to each other. Your spending is my income, and my spending is your income.
So what happens if everyone simultaneously slashes spending in an attempt to pay down debt? The answer is that everyone’s income falls — my income falls because you’re spending less, and your income falls because I’m spending less. And, as our incomes plunge, our debt problem gets worse, not better.
This isn’t a new insight. The great American economist Irving Fisher explained it all the way back in 1933, summarizing what he called “debt deflation” with the pithy slogan “the more the debtors pay, the more they owe.” Recent events, above all the austerity death spiral in Europe, have dramatically illustrated the truth of Fisher’s insight.
And there’s a clear moral to this story: When the private sector is frantically trying to pay down debt, the public sector should do the opposite, spending when the private sector can’t or won’t. By all means, let’s balance our budget once the economy has recovered — but not now. The boom, not the slump, is the right time for austerity.
As I said, this isn’t a new insight. So why have so many politicians insisted on pursuing austerity in slump? And why won’t they change course even as experience confirms the lessons of theory and history?
(click here to continue reading The Austerity Agenda – NYTimes.com.)
Politicians, and their banker masters, want to seize the opportunity to dismantle social programs, or even better privatize them.