Monday, February 16, 2009

Paradox of thrift

I have been pretty hard on the arguments being used to support the stimulus bill, so here is a well written defense of Keynesian stimulus:

...we seem to be starting to rediscover thrift. Debt levels are falling. Consumer spending is down. The savings rate is on the rise. Great, right? Not exactly. The sudden sobering up of the American consumer happens to be the No. 1 force driving the U.S. and global economies downward. We're saving more, yet we're all getting poorer.

This is what some economists call the paradox of thrift.
Keynes would have the government spend more to stave off Depression:
...government indebtedness and spending are being substituted for consumer indebtedness and spending. The federal deficit is projected to hit $1.2 trillion this year, and that's not counting the close to $1 trillion in further stimulus being contemplated by Congress.

This kind of behavior, contends McCulley, is what the paradox of thrift demands. "Uncle Sam has got to go the other direction and lever up his balance sheet and actually spend money," he says. Simply standing by and letting the downward economic spiral worsen strikes him as "inconsistent with a civilized society."

Still, the approach remains paradoxical. Our profligacy has gotten us into trouble, and so the response is ... more profligacy? There is no shortage of critics who contend that today's massive government spending is simply laying the foundation of another financial crisis, this one centering on a loss of confidence in Treasuries and the dollar.

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