Tuesday, November 23, 2010

Making the Wrong Argument

Krugman argues over and over that we need more government spending, that we should not worry about government debt, that government debt will bring recovery.

In my recent series on debt (beginning here) I have shown that government debt is not the debt that is holding our economy down. Private debt holds us down.

Note that there is no mention of government debt in this sentence: Private debt holds us down.

Increases in government debt have not brought recovery, not yet, and not since the 1970s. We never really recovered from that 1974 recession. Why? Because private debt holds us down.

Krugman is right: Increases in government debt should bring recovery. But the other guys are right, too: Increases in government debt don't bring recovery. So, are we gonna argue about this until we end up in a Dark Age? Or are we gonna take a step back and try to see what's missing from the discussion?

What's missing is any consideration of private debt.

1 comment:

Bigvic said...

Honestly, I think that private debt is the only thing propping us up. Where would effective demand have come from these decades without credit. I cannot even begin to imagine where the Aggregate Demand would have been without credit fueling it.

I think this post has inspired me though to try and trace this rise in private debt. I believe that it has to do with the component of the economy that we truly ignore: Energy. Energy is basically the main component in the shift of the Aggregate Supply curve, yet it is barely studied. I have compiled the literature on this in a day.

Another consideration for this is the distribution of wealth. Effective demand is further weakened by the concentration of wealth in the economy (or what Marx would call the paradox of capital accumulation), and therefore will require credit to keep the growth going.

Either way, great blog.