In bad times, folks cling to their money out of fear and that further stalls the economy.
Paul Krugman would be proud:
Some background: one of the high points of the semester, if you’re a teacher of introductory macroeconomics, comes when you explain how individual virtue can be public vice, how attempts by consumers to do the right thing by saving more can leave everyone worse off. The point is that if consumers cut their spending, and nothing else takes the place of that spending, the economy will slide into a recession, reducing everyone’s income.
Some of this has made me think about my family's apparent role in wrecking the economy. Over the past eighteen months, as we have seen my wife's income decline and long-term investment prospects worsen, here's how we have given into fear and engaged in wanton public vice:
1. We've made major efforts to pay our debts and not incur new ones--as did the Commonwealth of Virginia in the 1950s and 1960s, we have adopted the pay as you go strategy. I can report with shame that in the past ten months we have retired thousands of dollars of the family debt and have not borrowed a single penny for new expenditures. Strangely enough, however, the fact that we've returned as much as $10,000 back into circulation doesn't seem to have unfrozen the credit markets.
2. We've decided to keep each of our automobiles for at least two years longer than usual, and when we get rid of them we'll probably replace them with used [if you say pre-owned I have suspicions about your patriotism] vehicles. Thus we have personally contributed to cutting the throat of the Big 3 and unionized auto workers. No wonder they need billions of dollars in Federal bail-outs to continue paying people to produce cars that people really don't need to buy.
3. We've virtually ceased eating out, depriving an entire coterie of cooks, waitresses, and busboys [buspersons?] of their rightful income, which means that we should now pay additional taxes to cover the economic harm we've caused them.
4. By dint of ruthless buying in bulk, simplifying, and outright collusion with our neighbors, we've cut our grocery bills by nearly half, and have come to the point where we now treat the local Acme as a convenience store rather than a regular stop.
5. We stopped using the dry cleaners, and press our own goddamned clothes. Oops. That's obviously fearful, public vice, and requires us to fork over more money to pay for the people whose jobs we have destroyed.
6. We've started saving 10% of our take-home income rather than spend it, and we're currently investing it divided about equally between bottom-feeding on stocks and getting guaranteed interest (where that's still possible). But that's 10% that's not out there purchasing more useless crap made in China.
7. We've cut back almost all our magazine subscriptions, and we're beginning to wonder seriously how much sense it makes to have the Snooze Journal in the driveway every morning, since we now get about 1/3 less for the same price, and most of it is online for free anyway.
8. When we need new stuff, we shop at liquidators, discount stores, and eBay, trying to buy stuff other people are getting rid of, rather than pay full freight for new stuff.
All of this behavior, according to the neo-Keynesian construct, is exactly the wrong thing for us to be doing, so the State's plan is to take away the money we should have been spending, and spend it for us. If we don't run up debt on our own, the Feds will do it for us.
The haunting thing about this new mantra of spend on jobs and infrastructure without worrying about driving up the debt is that my progressive/liberal friends cannot see the parallelism to the big-government conservatives who said for the past eight years that we should spend on wars, NCLB, Medicaire Part D, and tax breaks for corporations without worrying about driving up the debt.
The true danger of Krugman's neo-Keynesian economics is not that it won't work, but that it will. If it does, all we will have managed is to delay some difficult choices about what the post-credit-boom economy should look like.