Tuesday, January 25, 2011

Recovery is Not Enough

In Being Paul Krugman I quoted PK saying that the "sensible" thing would be to "run deficits while the economy is depressed, then turn to budget-balancing once recovery is well in place."

For that to be anything but nonsense, we would have to expect a recovery substantial enough to permit budget-balancing to be realistically possible. We don't get recoveries like that anymore.

We get recovery, but we need economic restoration.

When we get "recovery," the recession ends. The growth we get is the growth we get. But the growth we get has been unacceptable since 1974. That's what killed Keynesian economics and gave birth to Reaganomics. And Reaganomics helped. But it was based on unsustainable strategies, like a continuously-increasing concentration of income and the continuous expansion of public and private debt.

Recovery is no longer sufficient. We need an economic restoration.

Recently I spoke of a comment by Pluto Finnigan:

Before the crisis, Pluto observes, employment was sustained by "an unsustainable credit expansion." He suggests that the present high unemployment may be the best we can expect, in a world where credit expands at a sustainable rate. The issue Pluto raises is credit-efficiency.

Credit-use boosts the economy but adds to accumulated debt, which is a drag on the economy. The longer we continue to rely on credit for growth, the bigger the drag, and the less efficient is credit-use as a way to boost growth. After a while, to counteract the drag you need an "unsustainable" credit expansion.

Our economy ran into problems with accumulated debt in the 1970s. Since then our policies have put more and more emphasis on improving growth. But our pro-growth policies are still built on the notion that we need credit for growth. Those policies only increase the accumulation of debt. That is why growth remains inadequate.

Recovery is not enough. We need economic restoration. We can achieve restoration by wiping out half our accumulated debt, more or less. But a focus on public debt will achieve nothing. The big accumulation of debt is in the private sector.

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