Will Voters Punish Themselves?

In the November 1 NY Times Paul Krugman critiques the moralistic anti-debt sentiment that has provided one of the dominant themes of this election season. The cartoonish "debt is evil" sentiment that has made its way into political rhetoric around the world, "is the reason we’re mired in a seemingly endless slump," Krugman writes.

The key thing to bear in mind is that for the world as a whole, spending equals income. If one group of people — those with excessive debts — 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.

Corporations are cash-heavy, but unwilling to spend because capacity is idle. Consumers can obtain cheap loans, but are unwilling to spend because of fears about job security.

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 on homes that must be sold at a huge loss, and they start ranting....

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.

Read the whole article.