Into Another Depression ?
Good Economics Is Not about Punishing Bad Economies
June 28, 2010. Half of those who write to me about the national debt think the country has been bad and needs to be punished. And that means "cut government spending," which means fewer jobs. Fewer jobs! Can you think of a worse time to cut back on jobs? Well, can you?
This is well-meaning, moralistic nonsense. If someone's back goes out because they weren't strong enough to lift what they tried to lift, we wouldn't say "you've been slacking on your exercise, you must start lifting weights immediately." First, we let their muscles heal. Then we prescribe the necessary exercise.
In the U.S., conservatives are slightly ahead in the nonsense game, but relatively liberal Europe is right in step with our conservatives. Go figure. But what is frightening, is that this exact same nonsense -- "cut spending to prevent inflation" -- carried the day through the Great Depression, which is why it lasted 12 years. Only when WWII cut through the silliness and the government spent like crazy, did we pull out of it.
OK, lets take a look at specifics:
1. People were spending too much based on phony house prices. So we need a recession to get them back in line.
Wrong because the recession is mainly a matter of unemployment and the people who are hurt are generally not those who speculated on house prices.
2. Wasteful government spending is bad so the government should stop spending.
Nonsense. Of course wasteful government spending is bad. But if you notice you are wasting money on TV channels you don't watch, do you cut your spending across the board? No you cut the waste so you can spend the money on something you really need.
3. Inflation will get us if we don't cut government spending now.
Not too bright. Government spending can cause inflation by over-heating the economy. But an economy cannot be overheated and in recession -- that's a contradiction. So first the spending would have to get us out of the recession. Exactly what we want! When we see that, then we cut back on spending and raise interest rates to avoid inflation -- not a problem.