Item — HN Reader

"The idea that you can spend your way out of debt has been shown to be disastrous over and over,"

The idea is not that you can spend your way out of debt, that would be silly. The idea is that you can and should spend money to compensate for lack of demand in a recession, because the markets overshoot. Once you are out of recession, you must pay back the debt.

So austerity when the economy is good, spending when it is bad. Anti-cyclical government behavior.

Austerity in a recession is pro-cyclical. As was predicted and Greece (for example) has shown, a government cannot save itself out of debt in a recession, because tanking the economy at a crucial time like that makes the debt worse (as percent of GDP, and that's the crucial number in terms of ability to repay).

Update:

I am German, "living within your means" is sort of part of my DNA, and not living within your means is going to cause problems. But timing does matter!

1 comments

Totally agree. But then the question becomes, what do you do when countries actually increase spending and debt when the economy is good, and therefore have nothing to spend when the bad times arrive. The main distinction between Iceland and Ireland is that Iceland can print its own money.

In the UK it seems that 'nasty' parties that advocate spending cuts in the good times get voted out of office, and replaced by parties that increase spending.

So it becomes less a question of economics and more one of politics. For the moment Germany might see "living within your means" part of the DNA, but few other countries do. And I imagine that, as Germany gets further integrated with the rest of Europe, that kind of thinking will be weakened.

"But then the question becomes, what do you do when countries actually increase spending and debt when the economy is good, and therefore have nothing to spend when the bad times arrive." "So it becomes less a question of economics and more one of politics."

Precisely. And all the western countries have been guilty of this, the only difference is that of degree. Which is why debt has generally only crept up and politics has slowly but surely ceded sovereignty to the banks, especially in Europe where new currency is apparently only created via commercial banks (unlike the US, which just prints it).

"And I imagine that, as Germany gets further integrated with the rest of Europe, that kind of thinking will be weakened."

As far as I can tell that's the current political struggle, especially between the North and South.