Regular readers of this blog may know that I am a fan of Robert Nielsen, an economics student in Ireland. (You can read more of Robert’s work here (http://robertnielsen21.wordpress.com/).)
In his most recent post, “The Most Important Lesson Of Economics,” Robert completely dismantles Republican strategies for dealing with the recession. And he didn’t use any arcane theory, just used common sense. Here is his argument in a nutshell (you can read the full thing over at his blog):
“The importance of (the fact that “My Spending Is Your Income”) is that it explains recessions and unemployment. If for some reason a group of people stop spending, then some businesses will suffer a decline in sales. If this decline is large enough then they will have to fire staff and may even close themselves. This has a knock on effect as these redundant workers now have less money and therefore spend less, thereby reducing someone else’s income. This means further business closures and further redundancies. Even those who are lucky enough to keep their jobs will probably face pay cuts. The economy slips into a downward spiral and the newspapers fill with stories of closures and layoffs. Now imagine you are a consumer in this economy (or just remember how it felt in 2009). You would be naturally very scared of having your pay cut or even losing your job. The natural response would be to cut back on spending and save as much as you can, in other words to batten down the hatches. However, if you remember the lesson, while this is sensible on an individual level, it only makes the national problem worse. It leads to more layoffs and actually increases the likelihood that you will have a pay cut. It is for this reason that cutbacks are self-defeating.
“The lesson also explains what the solution to the crisis is. If the recession is caused by less spending causing lower income and uncertainty, then the solution is to boost spending and confidence. But who is to do the spending? It would be madness for a consumer to go on a spending spree, their income is limited and they are afraid of future cutbacks. Each individual is too small to have an effect on the economy, so no one will spend unless everyone else is spending too, with the result that no one spends. The economy would get a boost if businesses increased their spending, but what business is going to invest in this economic climate? Their sales are down already so it makes little sense for any individual to expand (this is the reverse of the problem above. What is illogical on an individual level makes sense on a national level). Therefore the only one left is the government. The government is the only body large enough that if it increased its spending it would have an impact on the economy. We must rely on it to pull the economy out of the recession, not for ideological reasons but simply because it is the only one that can. Furthermore if the government guarantees no further cutbacks and launches a program of large spending, then this will reduce the uncertainty in the economy. Consumers will no longer hoard money and delay expenses but will return to normal spending patterns. Businesses in turn will expand to meet this demand and thus boost the economy.
“Now some might object to the government spending money as this will increase the national debt. But what is the point of the national debt if not something to be resorted to in times of emergency? Isn’t the point of borrowing to help us out of hard times? This is commonly practiced by consumers and businesses so why not the government too? Sure it will have to be paid back, but that is an action for the boom when the economy is doing well. In a recession, the government must spend or else the economy will stagnate (in which case the debt will never get paid back). When your car is caught in a ditch, your main concern is not using up too much fuel. Instead you have to (regardless of whether you want to or not or even if it was speeding that got you in the ditch in the first place) slam the accelerator to boost the car out of the ditch, whereupon you can return to focusing on fuel conservation.”
Well done, Robert . . . again!