Friday, September 30, 2016

Why Is Austerity The Preferred Response To Recession?

Paul Krugman applauds an article by an economist who blames right wing ideologues for placing deficit reduction above the need to reduce unemployment.  He takes that argument to the next level. Deficit reduction is not exclusive to the right wing.  The public believes that government deficits are bad and that they should be reduced by cuts in government spending.  That view is also held by mainstream journalists who are not enamored of right wing ideology.  President Obama made a similar mistake when he compared government spending to household spending.  The implication is that sensible households avoid debt and governments should follow suit.  He probably did not realize that the cuts in government spending to reduce budget deficits wiped out the impact of his stimulus program.

If the bread winner in a household loses a source of income from unemployment spending must be cut because it is difficult to borrow.  The household also pays lower taxes which deprives the government of tax revenue.  Governments collect less tax revenue in recessions.  Consequently, budget deficits would increase and governments would have to cut spending to balance their budgets.  When governments cut spending along with cuts in household spending the economy will shrink even further.

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