Krugman: The only way govt. belt-tightening won’t hurt growth is if consumers take on more debt

Krugman: The only way govt. belt-tightening won’t hurt growth is if consumers take on more debt

That’s a rather stunning statement, isn’t it? We’re in an environment in which government cutback (“austerity” is the moral-sounding term for it) is being urged in the US, the UK and all across Europe. But if government slows spending, where will replacement spending come from?

The answer is in the headline: In the current jobless environment, the only way government belt-tightening can work is if households increase their debt.

And before you think this is some left-wing economist talking, the idea comes from the conservative UK government itself, from one of their reports arguing for government cutbacks. Amazing.

Paul Krugman brings us news of this deeply dishonest argument (my emphasis):

[I]n Britain, via Yves Smith, people have been digging into the details of the government forecast, and finding that it relies on the assumption that household debt will rise to new heightsrelative to income[.] …

Why? Because the only way the economy can avoid taking a hit from government cuts is if private spending rises to fill the gap — and although you rarely hear the austerians admitting this, the only way that can happen is if people take on more debt. …

All in all, it’s quite a spectacle. It would be funny, except that millions of people will suffer the cost of this folly.

The blog post contains a government-generated chart that documents that assumption; it shows “Projected ratio of household debt to income” rising, from 160% to 175% as the engine of this supposed new growth that austerity will somehow cause.

As I said, a deeply dishonest argument, yet you can hear it being made as we speak, for example, here. Krugman on the hypocrisy:

So we have the spectacle of a government that inveighs against the evils of debt pinning all its hopes on an assumption that over-indebted households will dig their hole even deeper.

It seems pretty clear that the headline statement, if true, is actually an argument that government cutbacks willcontract the economy, not expand it. After all, which of us will increase our own debt if government cuts back its social services, its safety net? Very few, I think. A double-dip recession could be just as likely as economic expansion.

Not that any of this will stop the new “austerians” (as Krugman calls them), from pressing forward anyway — including, it seems, our Reagan-admiring current president. (For more about what austerity is doing to the UK,see this by Chris in Paris. Not pretty.)

 

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This entry was posted in Background & Analysis, Obama, Political Economy, US Economy. Bookmark the permalink.

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