Robert Stein 1924-2014

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Friday, October 31, 2008

The Thrift Trap

Today's economics lecture from Nobel Prize winner Paul Krugman is deeply disquieting. The bad news, in a nutshell, is that American consumers are tightening their belts at the worst possible time.

"(I)f consumers cut their spending," he writes, "and nothing else takes the place of that spending, the economy will slide into a recession, reducing everyone’s income.

"In fact, consumers’ income may actually fall more than their spending, so that their attempt to save more backfires--a possibility known as the paradox of thrift."

The normal remedies, such as cutting interest rates, have been used up, Krugman argues, leaving only government spending (pace John McCain) "to take the place of retrenching consumers...a major fiscal stimulus. And this time the stimulus should take the form of actual government spending rather than rebate checks that consumers probably wouldn’t spend."

If Krugman is right, the usual arguments about tax-and-spend liberals will have to be put on hold, as a bipartisan post-Bush government considers putting massive amounts of money into crumbling roads, tunnels and bridges--to say nothing of education and health care--not only to restore the infrastructure but the economy as well.

For a start, some of it could come from reducing the $10 billion a month that is still being poured down the drain in Iraq.

Government spending, not always wisely, helped put the country back on track in the 1930s. Obama is going to need an even better Brain Trust than FDR put together.

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