Summary: Suddenly everybody has got financial religion. End the deficits! Pay down the debt! Increase saving! What does this mean for our future? My guess: not much. Except to delay necessary action. This post has some exaggeration for emphasis.
Bad news for the faithful: saving is not like chastity or fidelity. Every young girl can be chaste. Every spouse can be faithful. At least in theory. But everybody cannot save at the same time. While the right have convinced their flock that Keynes was evil, his paradox of thrift is just arithmetic. Everybody can reduce spending. But your spending is my income. This accomplishes merely slows the nation. The economy ratchets down, we all become poorer.
We have the example of the first great Austerian. President Hoover wrote in his Memoirs that Andrew Mellon, as Secretary of the Treasury, had
“… only one formula: liquidate labor, liquidate stocks, liquidate the farmers, and liquidate real estate…. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.“
That did not work well for us. Nor did austerity work for the leaders of the Weimar Republic. Despite those examples, today we hear similar advice from conservatives — including the Tea Party movement. But I doubt their sincerity. As Franklin said (paraphrasing), “purge the rottenness” is good only in the second person: purge your rottenness. Or the third person: purge their rottenness. In the first person, my rottenness, it is a public good — to be preserved if necessary with massive government action.
So it will be with America, I predict. We have re-born-again deficit hawks: horrified with deficits under Clinton and Obama; comfortable with deficits under Reagan, Bush Sr and Jr. They see cutting the deficit as painless to themselves. For evidence see
- A look at our government’s debt – rising because we like to spend
- A poll shows the source of America’s problems
- The Tea Party movement develops a platform. It’s the Underpants Gnomes Business Plan!
When their prosperity becomes threatened, rapid and aggressive government action will become a national imperative. The next year might test the Austerians sincerity and integrity.
This post provides a introduction to a great paper, a must-read for anyone interested in understanding our current situation: “Fetters of Gold and Paper“, Barry Eichengreen and Peter Temin, National Bureau of Economic Research, July 2010.
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