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A country is not a kitchen table: Why austerity is bad economics
While sometimes useful and attractive, analogies can also be misleading and downright harmful. Take the favorite Republican meme, which unfortunately is repeated by many Democrats, that in tough economic times the government needs to tighten its belt (= austerity), just as families must do. Let's review why this analogy falls apart:
Imagine you own a restaurant and a bunch of your customers — after watching the Suzy Orman Show — decide they need to cut their spending and pay down their credit card debt instead of eating out. That may be the wise, responsible choice for each family's bottom line, but it's terrible for your restaurant business. In response, you need to cut your spending so you lay off some of your staff. Because unemployment is high and hours are tough to get, your former employees must in turn cut their spending at the mall, the bookstore, the grocery store, the hair salon, etc. And now even fewer folks can afford to dine at your restaurant. The belt-tightening death spiral is now in full swing.
Nobel Prize-winning economist Paul Krugman explains here why austerity programs are the exact opposite of what the federal government needs to do in times of dwindling demand and high unemployment. When consumers, businesses and state & local governments are cutting spending to improve their bottom lines, the economy will stagnate, or worse, continue to death spiral down from lack of demand.

As long as we are in a liquidity trap of high unemployment despite rock-bottom interest rates, the best response of the federal government is to spend (even borrowed money) to put people to work so they'll have money to buy things and keep money circulating. And unlike your family budget, every time that money changes hands, it brings in more tax revenue back to the federal government to pay for the spending.

In short, the federal government, with its ability to run deficits and borrow cheaply now, becomes the spender of last resort. It may seem counter-intuitive until you let go of the misleading "family budget" analogy. Once we do that, we can actually fix this economy rather quickly. And paradoxically, it turns out the best way to fix the deficit is to invest big now to get people back work so they are paying taxes and depending less on safety net programs.

Finally, riddle me this... Why is the kitchen table/family budget analogy only invoked for the spending side? When it comes to revenue, Republicans insist that you can cut tax rates — analogous to cutting your hourly rate — and magically bring in more money. Really? When has that ever worked in your family?

What’s more, why do the “family budget” analogists always ignore that even fiscally responsible families take out mortgages and student loans that may well exceed their annual income? Taking out debt to invest in the future or address a crisis is sometimes the prudent thing to do. Imagine, for example, your roof is falling apart and you can borrow $10,000 at 1.7% annual interest for 10 years. Do you add to your debt and fix your roof, or do you watch the next rainstorm destroy your house?

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Comment Preferences

  •  They're Focusing Now on a Different Lie Than the (6+ / 0-)

    claim that cutting taxes increases government revenue. As far as I've been hearing, they left that back in the Reagon-Bush II era.

    They're often lying now saying that business will have more money and so will hire more people. That's a lie that can be made obvious to average voters because business is already sitting on some 2 trillion dollars in cash which it's not using to hire or expand.

    The reason all these people from politicians to economists and commentators put out these lies is because they seek the damage the policies cause: the transferring of most of the nation's wealth and opportunity from the masses to top owners.

    We are called to speak for the weak, for the voiceless, for victims of our nation and for those it calls enemy.... --ML King "Beyond Vietnam"

    by Gooserock on Sun May 12, 2013 at 05:54:57 PM PDT

  •  There is an economist, columnist. . . (3+ / 0-)

    . . .who writes for the Everett Herald.  He believes in the "morality play" of budget economics. He is not very good and my responses get to him apparently.  My last missive caused me to coin a new term to describe what these "moral dictators" believe.  I called it"projectile austerity" in my letter to the editor.

    If we are going to elect Democrats, lets elect real ones!

    by waztec on Sun May 12, 2013 at 06:10:52 PM PDT

  •  My take is (2+ / 0-)
    Recommended by:
    OooSillyMe, fumie

    that if in tough economic times the government needs to tighten its belt (= austerity), just as families must do, then let's continue with the analogy.

    "So your family gets into a tough economic time, either because you got fired or someone has to be hospitalized, or whatever. So let's say that happens, and so you have to tighten your belts.

    Then what?

    Tighten it some more? Then more? And more? Pretty soon you'll be living in a dark house with no electricity, no water, eating dogfood from a can.

    The thing is, you don't tighten your belts, do you? If you got fired, you try to find a new job, by spending to print new resumes, spending to go to interviews, even spending to get additional training so you can be more attractive to prospective employers.

    And that's what the US has to do to; it has to spend so it can get new sources of income, so it can climb out of the fiscal hole.

    But that's not what Republicans want. They want the US to tighten, tighten, tighten, until we all end up eating dogfood from cans.

    Is that what you want too?"

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