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Sunday, October 31, 2010

Paul Krugman: Mugged by the Moralizers

The moralizers are winning, though winning may be the wrong term to use for something that makes us worse off:

Mugged by the Moralizers, by Paul Krugman, Commentary, NY Times: “How many of you people want to pay for your neighbor’s mortgage that has an extra bathroom and can’t pay their bills?” That’s the question CNBC’s Rick Santelli famously asked in 2009, in a rant widely credited with giving birth to the Tea Party movement.
It’s a sentiment that resonates not just in America but in much of the world...: debt is evil, debtors must pay for their sins, and from now on we all must live within our means. And that kind of moralizing is the reason we’re mired in a seemingly endless slump.
The years leading up to the 2008 crisis were indeed marked by unsustainable borrowing... When lenders suddenly decided that they had lent too much,... debtors were forced to slash spending. This pushed the world into the deepest recession since the 1930s. ...
The key thing to bear in mind is that for the world as a whole, spending equals income. If one group of people ... is forced to cut spending to pay down its debts, one of two things must happen: either someone else must spend more, or world income will fall.
Yet those parts of the private sector not burdened by high levels of debt see little reason to increase spending. Corporations are flush with cash — but why expand when so much ... capacity ... is sitting idle? Consumers ... incentive to spend is ... outweighed by worries about a weak job market. Nobody in the private sector is willing to fill the hole created by the debt overhang.
So what should we be doing? First, governments should be spending while the private sector won’t, so that debtors can pay down their debts without perpetuating a global slump. Second, governments should be promoting widespread debt relief: reducing obligations to levels the debtors can handle is the fastest way to eliminate that debt overhang.
But the moralizers will have none of it. They denounce deficit spending, declaring that you can’t solve debt problems with more debt. They denounce debt relief, calling it a reward for the undeserving.
And if you point out that their arguments don’t add up, they fly into a rage. Try to explain that when debtors spend less, the economy will be depressed unless somebody else spends more, and they call you a socialist. Try to explain why mortgage relief is better for America than foreclosing ... at a huge loss, and they start ranting like Mr. Santelli. ...
And those who should know better lack all conviction. John Boehner ... was widely mocked ... when he declared that “It’s time for government to tighten their belts” — in the face of depressed private spending, the government should spend more, not less. But since then President Obama has repeatedly used the same metaphor...
 Meanwhile, the administration’s mortgage modification program — the program that inspired the Santelli rant — has ... accomplished almost nothing. At least part of the reason is that officials were so worried that they might be accused of helping the undeserving that they ended up helping almost nobody.
So the moralizers are winning. More and more voters, both here and in Europe, are convinced that what we need is not more stimulus but more punishment. Governments must tighten their belts; debtors must pay what they owe.
The irony is that in their determination to punish the undeserving, voters are punishing themselves: by rejecting fiscal stimulus and debt relief, they’re perpetuating high unemployment. They are, in effect, cutting off their own jobs to spite their neighbors.
But they don’t know that. And because they don’t, the slump will go on.

    Posted by on Sunday, October 31, 2010 at 11:43 PM in Economics | Permalink  Comments (135)


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