One of the most obvious trends during the Little Depression has been that the average American's has greatly reduced his consumption of goods and services and increased his savings - or, more likely, made an effort to pay down debt. It's not hard to see why. If you observe enough of your friends and neighbors overwhelmed by debt after losing their job, it's enough to scare anyone into thrift. But, Keynsians are apparently throwing up their hands in despair over the "paradox of thrift," which provides that an increase in the savings rate will slow down or stall any economic recovery. If that's really the case, I must be too stupid to understand economics:
Since the financial crisis erupted, millions of Americans have ditched their credit cards, accelerated mortgage payments and cut off credit lines that during the good times were used like a bottomless piggybank. Many have resorted to a practice once thought old-fashioned—delaying purchases until they have the cash.
As a result, total household debt—through payment or default—fell by $1.1 trillion, or 8.6%, from mid-2008 through the first half of 2011, according to the Federal Reserve Bank of New York. Auto loan and credit-card balances in August had their biggest drop since April 2010, the Federal Reserve said.
The national belt-tightening, known as deleveraging, comes as the U.S. economy struggles to fend off a double-dip recession. Paying off bills slows consumer spending on appliances, travel and a slew of other products and services. Home sales, the engine of past economic recoveries, remain depressed.
Deleveraging should help the U.S. economy in the long-run, putting households on a sounder footing and easing the nation's reliance on the savings of Chinese and other foreign nationals. But there are short-term dangers.
During the Great Depression, economist John Maynard Keynes warned of a so-called paradox of thrift: When everyone turns frugal, everyone suffers. Synchronized thrift slows the economy, according to Keynes, which hobbles income growth and makes people even stingier in a pernicious cycle.I've been hearing all my life (pretty much) from nagging liberals about how the American public is a "greedy" bunch that takes on too much debt, consumes to many resources, and doesn't save enough money. In fact, remember how people used to rail (falsely) against George Bush for telling people to "go shopping" after 9/11? "Where's the grand calls for sacrifice?" moaned the Paul Krugmans of the world. Now that Americans are actually doing these things, they are destroying the economy! (and now that the times really do require sacrifice by members of the leftist coalition, they are suddenly taking it to the streets. Where's your sacrifice now, Krugman?)
Some experts worry that is happening now. Since the recession ended in mid-2009, the U.S. economy has expanded at a 2.5% annual rate, far slower than the average growth of 4.3% during the first two years of the previous four recoveries.
It's not hard to look around the world and see what is working, and what isn't. Countries that bit the bullet, let banks fail, reduced public expenditures, and paid down debt are stable and growing. Countries that are bailing out banks and trying to keep the welfare checks flowing are beset by riots and the looming specter of default and worse. In America, it's clear that the general public knows what will pull us out of this mess, but the people with their hands on the economy's levers are stuck pontificating about paradoxes.
A president who, in 2008-2009 could have spoken bluntly about the short-term pain of budget cuts and bank failures, and then guided the nation through a year of real austerity measures, would be a hero overseeing a growing economy. But, that's not the sort of president we had back then. We can only hope that whoever is taking the oath of office in 2013 will be up to the task of repairing the damage, not just to the economy, but also to our society.