Start with the economics. We currently have a deeply depressed economy. We will almost certainly continue to have a depressed economy all through next year. And we will probably have a depressed economy through 2013 as well, if not beyond.
The worst thing you can do in these circumstances is slash government spending, since that will depress the economy even further. Pay no attention to those who invoke the confidence fairy, claiming that tough action on the budget will reassure businesses and consumers, leading them to spend more. It doesn't work that way, a fact confirmed by many studies of the historical record.
Indeed, slashing spending while the economy is depressed won't even help the budget situation much, and might well make it worse. On one side, interest rates on federal borrowing are currently very low, so spending cuts now will do little to reduce future interest costs. On the other side, making the economy weaker now will also hurt its long-run prospects, which will in turn reduce future revenue. So those demanding spending cuts now are like medieval doctors who treated the sick by bleeding them, and thereby made them even sicker.
These concepts are not all that difficult to understand. But Americans apparently would rather listen to the simplistic "solutions" served up by Tea Party Republicans. Why is this dangerous? Rana Foroohar explains in a Time magazine essay titled "Balanced-Budget Blues: If families have to balance budgets, government should too, right? Wrong." Writes Foroohar:
Folksy politics is always difficult to counter successfully, in part because it has such strong emotional appeal. Consider the hoopla over raising the U.S. federal debt ceiling and the Republican efforts to pass a balanced-budget amendment to force the U.S. to make whatever spending cuts are required to get into the black and stay there, year after year.
The conservatives pushing this "cut, cap and balance" plan have a very powerful and easy-to-digest sales pitch: since no individual household can continually spend more than its income, why should the federal government be able to? It's a compelling question, especially if you look at the federal government's budget the same way you would look at your family's.
Folksiness, however, can lead the public down a dangerous path. Writes Foroohar:
But the macroeconomy doesn't work like the microeconomy, and there's a good reason why. It's called the paradox of thrift, which was first elucidated by British economist John Maynard Keynes. The idea is simple: while you and I as individuals can improve our financial position by saving, society as a whole often cannot -- especially during times of recession and sluggish economic growth, like now. That's because when we all decide to start saving, nobody shows up at the shops to spend. Consumption, which accounts for about 60% of all economic activity in the U.S., goes down, and consequently so do incomes and employment. It's news to no one that this is exactly what has been happening. Amazingly, after two years of economic "recovery," unemployment isn't falling but rising.
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