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Monday, December 17, 2012

Government should tighten its belt

Paul Krugman wrote 3 years ago:
Mr. Obama used language that was almost identical to widely ridiculed remarks early last year by John Boehner, the House minority leader. Boehner then: “American families are tightening their belt, but they don’t see government tightening its belt.” Obama now: “Families across the country are tightening their belts and making tough decisions. The federal government should do the same.”
Now NPR radio says:
Now throughout the debate about the deficits and debt, you've probably heard a certain metaphor: One that compares the nation to a household. Well, that metaphor bothers one of the nation's leading economists, Robert Shiller of Yale University.

"I think that when we think about the nation, we think about the family," Shiller says. "And we think that if bad times come, we need to tighten our belt; cut back on our spending."

That metaphor doesn't work so well when it comes to the nation's economic tough times, he argues, because the income of a nation depends on spending.

"If we in one family cut back on our spending, it won't effect our income," he explains. "But if everybody cuts back on their spending, it will lower the national income."
The left hates the family metaphor, and so does Krugman.

Economists also say that a government increases the national income by borrowing money to build a pyramid.

Shiller refers to the Keynesian paradox of thrift, which says that when people save money, they don't buy as much stuff.

A comment explains:
Mr. Shiller totally misunderstands, or misrepresents, the metaphor.

It is not "if bad times come, we need to tighten our belt".

Rather it it is: Although we need to invest in the future, we can not permanently live beyond our means (either as households or as a nation). Which is of course what our government has been doing for the last several decades.

Ideally (whether we are a household or a government) we would pay down our debt in good times, so that we can borrow more (and spend more) in bad times. But politicians can not resist the temptation in good times to spend a surplus (without paying off what we already owe). So then when the bad times come, we are in no position to take on more debt (as Mr. Shiller rightly points out we should).

If our government had acted wisely in the past Mr. Shiller's arguments would make sense; since they have not acted wisely his arguments are irrelevant.

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