Naked Capitalism has the article Bill Black: Obama Loved Austerity and the New Democrats Remain Addicted to It which you can also find on New Economic Perspectives as The New Democrats’ Addiction to Austerity Will Not Die.
People tell me that they cannot understand economics. So here is the essential lesson that you have to know boiled down to three paragraphs. If you cannot understand this, please let’s discuss it. This is essential to understand. If you can’t get it, you cannot understand how our Federal Government is supposed to operate. If you can’t understand that, how can you decide whom to vote for?
In a serious contraction, particularly one following a credit-driven bubble, consumers are worried about losing their jobs. They begin to repay their debts and reducing consumption. This is perfectly rational from their perspective. CEOs react to the fall in consumer demand in an equally rational manner – they reduce output and spending on investments. Banks are likely to constrain credit and try to build capital. This too is rational. The result is that there is inadequate demand and unemployment and business failures rise. At the very time that demand is most inadequate and the need for spending on consumption and investment would be most helpful to the economic recovery, consumers and CEOs are likely to do the opposite. Economists call this “the paradox of thrift.”
There is one entity that is an ideal position to do the opposite – to increase demand in response to a recession or depression. This entity is not credit-constrained by bankers. The entity is a government with a sovereign currency that borrows only in that currency and allows that currency to freely float. The U.S. is such a nation. It is critical that our federal government provide fiscal stimulus, in addition to the automatic stabilizers, to counter the recession or depression.
Obama’s metaphor is exactly the opposite of economic literacy. If “families across the country are tightening their belts” then it is particularly essential that the federal government do the opposite – not “the same” – to counter the effects of the sharp fall in effective demand.
Bill Black is just telling us what economists have known since 1930s and 1940s, and was taught in college economics courses in the 1960s. It is so very unfortunate that propagandists like Milton Freidman have succeeded in making even economists unlearn the truth they used to know.