Home » Opinion » Foreign Views
Belt-tightening costs jobs since consumers don't buy
By Robert J. Shiller |
March 26, 2013, Tuesday
|
Print Edition
Print Edition
WITH much of the global economy apparently trapped in a long and painful austerity-induced slump, it is time to admit that the trap is entirely of our own making. We have constructed it from unfortunate habits of thought about how to handle spiraling public debt.
People developed these habits on the basis of the experiences of their families and friends: when in debt trouble, one must cut spending and pass through a period of austerity until the burden (debt relative to income) is reduced.
That means no meals out for a while, no new cars, and no new clothes. It seems like common sense - even moral virtue - to respond this way.
But, while that approach to debt works well for a single household in trouble, it does not work well for an entire economy. This is the paradox of thrift: belt-tightening causes people to lose their jobs, because other people are not buying what they produce.
There is a way out of this trap, but only if we tilt the discussion about how to lower the debt/GDP ratio away from austerity - higher taxes and lower spending - toward debt-friendly stimulus: increasing taxes even more and raising government expenditure in the same proportion.
That way, the debt/GDP ratio declines because the denominator (economic output) increases, not because the numerator (the total the government has borrowed) declines.
This kind of enlightened stimulus runs into strong prejudices. For starters, people tend to think of taxes as a loathsome infringement on their freedom, as if petty bureaucrats will inevitably squander the increased revenue on useless and ineffective government employees and programs. But the additional work done does not necessarily involve only government employees, and citizens can have some voice in how the expenditure is directed.
Temporary tax
People also believe that tax increases cannot realistically be purely temporary expedients in an economic crisis, and that they must be regarded as an opening wedge that should be avoided at all costs. History shows, however, that tax increases, if expressly designated as temporary, are indeed reversed later. That is what happens after major wars, for example.
We need to consider such issues in trying to understand why, for example, Italian voters last month rejected the sober economist Mario Monti, who forced austerity on them, notably by raising property taxes. Italians are in the habit of thinking that tax increases necessarily go only to paying off rich investors, rather than to paying for government services like better roads and schools.
Keynesian stimulus policy is habitually described as deficit spending, not tax-financed spending.
Stimulus by tax cuts might almost seem to be built on deception, for its effect on consumption and investment expenditure seems to require individuals to forget that they will be taxed later for public spending today, when the government repays the debt with interest.
If individuals were rational and well informed, they might conclude that they should not spend more, despite tax cuts, since the cuts are not real.
Insufficient demand
We do not need to rely on such tricks to stimulate the economy and reduce the ratio of debt to income. The fundamental economic problem that currently troubles much of the world is insufficient demand.
Debt-friendly stimulus might be regarded as nothing more than a collective decision by all of us to spend more to jump-start the economy. It has nothing to do with taking on debt or tricking people about future taxes.
If left to individual decisions, people would not spend more on consumption, but maybe we can vote for a government that will compel us all to do that collectively, thereby creating enough demand to put the economy on an even keel in short order.
Simply put, Keynesian stimulus does not necessarily entail more government debt, as popular discourse seems continually to assume. Rather, stimulus is about collective decisions to get aggregate spending back on track.
Because it is a collective decision, the spending naturally involves different kinds of consumption than we would make individually - say, better highways, rather than more dinners out. But that should be okay, especially if we all have jobs.
If and when people understand that it means the same average level of take-home pay after taxes, plus the benefits of more jobs and of the products of additional government expenditure (such as new highways), they may well wonder why they ever tried stimulus any other way.
Robert J. Shiller is professor of economics at Yale University. Copyright: Project Syndicate, 2013.www.project-syndicate.org. Shanghai Daily condensed the article.
People developed these habits on the basis of the experiences of their families and friends: when in debt trouble, one must cut spending and pass through a period of austerity until the burden (debt relative to income) is reduced.
That means no meals out for a while, no new cars, and no new clothes. It seems like common sense - even moral virtue - to respond this way.
But, while that approach to debt works well for a single household in trouble, it does not work well for an entire economy. This is the paradox of thrift: belt-tightening causes people to lose their jobs, because other people are not buying what they produce.
There is a way out of this trap, but only if we tilt the discussion about how to lower the debt/GDP ratio away from austerity - higher taxes and lower spending - toward debt-friendly stimulus: increasing taxes even more and raising government expenditure in the same proportion.
That way, the debt/GDP ratio declines because the denominator (economic output) increases, not because the numerator (the total the government has borrowed) declines.
This kind of enlightened stimulus runs into strong prejudices. For starters, people tend to think of taxes as a loathsome infringement on their freedom, as if petty bureaucrats will inevitably squander the increased revenue on useless and ineffective government employees and programs. But the additional work done does not necessarily involve only government employees, and citizens can have some voice in how the expenditure is directed.
Temporary tax
People also believe that tax increases cannot realistically be purely temporary expedients in an economic crisis, and that they must be regarded as an opening wedge that should be avoided at all costs. History shows, however, that tax increases, if expressly designated as temporary, are indeed reversed later. That is what happens after major wars, for example.
We need to consider such issues in trying to understand why, for example, Italian voters last month rejected the sober economist Mario Monti, who forced austerity on them, notably by raising property taxes. Italians are in the habit of thinking that tax increases necessarily go only to paying off rich investors, rather than to paying for government services like better roads and schools.
Keynesian stimulus policy is habitually described as deficit spending, not tax-financed spending.
Stimulus by tax cuts might almost seem to be built on deception, for its effect on consumption and investment expenditure seems to require individuals to forget that they will be taxed later for public spending today, when the government repays the debt with interest.
If individuals were rational and well informed, they might conclude that they should not spend more, despite tax cuts, since the cuts are not real.
Insufficient demand
We do not need to rely on such tricks to stimulate the economy and reduce the ratio of debt to income. The fundamental economic problem that currently troubles much of the world is insufficient demand.
Debt-friendly stimulus might be regarded as nothing more than a collective decision by all of us to spend more to jump-start the economy. It has nothing to do with taking on debt or tricking people about future taxes.
If left to individual decisions, people would not spend more on consumption, but maybe we can vote for a government that will compel us all to do that collectively, thereby creating enough demand to put the economy on an even keel in short order.
Simply put, Keynesian stimulus does not necessarily entail more government debt, as popular discourse seems continually to assume. Rather, stimulus is about collective decisions to get aggregate spending back on track.
Because it is a collective decision, the spending naturally involves different kinds of consumption than we would make individually - say, better highways, rather than more dinners out. But that should be okay, especially if we all have jobs.
If and when people understand that it means the same average level of take-home pay after taxes, plus the benefits of more jobs and of the products of additional government expenditure (such as new highways), they may well wonder why they ever tried stimulus any other way.
Robert J. Shiller is professor of economics at Yale University. Copyright: Project Syndicate, 2013.www.project-syndicate.org. Shanghai Daily condensed the article.
- About Us
- |
- Terms of Use
- |
-
RSS - |
- Privacy Policy
- |
- Contact Us
- |
- Shanghai Call Center: 962288
- |
- Tip-off hotline: 52920043
- 沪ICP证：沪ICP备05050403号-1
- |
- 互联网新闻信息服务许可证：31120180004
- |
- 网络视听许可证：0909346
- |
- 广播电视节目制作许可证：沪字第354号
- |
- 增值电信业务经营许可证：沪B2-20120012
Copyright © 1999- Shanghai Daily. All rights reserved.Preferably viewed with Internet Explorer 8 or newer browsers.
