The ‘paradox of thrift’ is where everyone cuts back their spending and increases their savings at the same time, resulting in the ‘paradox’ of everyone losing income and increasing debt. This results invariably and always in a recession or worse, a depression. The reason it does is because the cutback of spending reduces demand for product and services which reduces the need for employment, which in turn further reduces spending, which in turn further reduces the demand for product and services—well, you get the picture.
It would not be a ‘paradox’ for long if the public actually did ‘get the picture.’ If they did they’d support a huge increases in public investment and spending which, in turn, would increase demand which would, in turn, increase employment, which would in turn, increase spending–etc. etc. The cycle of declining income and increasing debt would be stopped or even reversed into a positive cycle of increasing income and declining debt. The recession or depression would end. Unfortunately the public, or at least a sufficient number of the public, do not ‘get’ the paradox. As a result they are in a muddle, not knowing what needs to be done nationally.
Well, if the average Joe on the street doesn’t understand the paradox, surely the political leadership would and they would enact policies of increasing government spending and public investment. Nope. Political leaders in Europe, for example, did exactly the opposite. They forced countries to decrease spending as a percentage of Gross Domestic Product (GDP), which of course resulted in GDP precipitously declining (the paradox kicking in) and national incomes plunging through the floor, while unemployment rose through the ceiling. And guess what? Debt as a percentage of income actually increased! Got to love that paradox.
In the United States, it took a couple years for the forces of austerity to gain the upper hand. The delay occurred because the recession came during a presidential election year in 2008 and the majority voted into office a Democrat for President, Barack Obama, and they voted in Democrat majorities in both the Senate and the House of Representatives. Because of that election year, Democrats were able to pass modest stimulus over Republican opposition. But the amount was far too small in absolute terms to do much more than avoid a Great Depression. In addition, the Republicans were so much opposed to the new President, they forced most of the stimulus to come in the form of inefficient tax cuts instead of funding programs that would have directly helped alleviate unemployment by hiring corporations and labor to rebuild public infrastructures. Because the stimulus took this form, hiring was subdued compared to what would have happened had national infrastructure programs been funded.
Even that modest effort ended when Republicans gained a majority in the House during the mid term elections of 2010. At that point, austerity policies began to be forced by the Republican House majority. After that the United States became just like Europe in terms of austerity, with the major difference being timing in that the US did implement some stimulus for two years.
The results of austerity in Europe are just as the ‘paradox of thrift’ predicts: Debt has become more burdensome, both in the public as well as the private sectors; incomes have plunged; unemployment has soared; economies have grown at a snail’s pace at best but most have dropped back into recession. In the US the recovery is modest and hiring is too slow, but the austerity policies implemented beginning in 2010 are just beginning to have effect, so it is at this point unknown to what degree they will slow the recovery further–or even stop it altogether and reverse the growth as has been the case in Europe.
From the perspective of anyone who does understand the paradox of thrift, there is the puzzle of why austerity ends up being the policy of choice in these circumstances. Surely leadership must understand that trimming government spending should be applied when economies are robust, not when they are in the dumps. Why would leadership not understand? The answer may come from understanding that the wealthy are the owners of debt whereas the majority of the creditors are not the wealthy. If the wealthy are to be protected, then creditors must be forced to pay. If they cannot, then their assets must be seized at tremendous discount–a situation painful to the creditor, but an opportunity for the wealthy to increase their ownership of assets at heavily discounted prices. As for sovereign debt, the wealthy will gain control of the political process and require that any income generated must first be applied to paying that public debt.
There is also another major victory within the grasp of the wealthy: The elimination of social programs from which the wealthy do not benefit but have to pay for in proportion.
The ground is already being laid for this elimination of programs. The GOP controlled House has submitted legislation that allows for the federal government to prioritize what creditors get paid first. That legislation (the Orwellian labeled ‘full faith and credit act’ HR 807) puts first the assets owned by the wealthy, and allows for non payment of social programs which are further down the list of priorities.
So the application of austerity right now, seen in this light of transferring more wealth to the already wealthy, makes perfect sense. For the wealthy.