[I don't usually post Krugman columns because everyone reads them, but this is a particularly good summation of a situation that many of us have tried to sum up, and explain, many times.]
http://www.nytimes.com/2010/11/01/opinion/01krugman.html
The New York Times
October 31, 2010
Mugged by the Moralizers
By PAUL KRUGMAN
"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. The tone differs from place to place -- listening to a German
official denounce deficits, my wife whispered, "We'll all be handed
whips as we leave, so we can flagellate ourselves." But the message is
the same: 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, going far beyond the subprime loans many
people still believe, wrongly, were at the heart of the problem. Real
estate speculation ran wild in Florida and Nevada, but also in Spain,
Ireland and Latvia. And all of it was paid for with borrowed money.
This borrowing made the world as a whole neither richer nor poorer: one
person's debt is another person's asset. But it made the world
vulnerable. When lenders suddenly decided that they had lent too much,
that debt levels were excessive, debtors were forced to slash spending.
This pushed the world into the deepest recession since the 1930s. And
recovery, such as it is, has been weak and uncertain -- which is
exactly what we should have expected, given the overhang of debt.
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.
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 of the capacity they already
have is sitting idle? Consumers who didn't overborrow can get loans at
low rates -- but that incentive to spend is more than 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 on homes that must be sold at a huge loss, and they
start ranting like Mr. Santelli. No question about it: the moralizers
are filled with a passionate intensity.
And those who should know better lack all conviction.
John Boehner, the House minority leader, was widely mocked last year
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, promising to match private belt-tightening with
public belt-tightening. Does he lack the courage to challenge popular
misconceptions, or is this just intellectual laziness? Either way, if
the president won't defend the logic of his own policies, who will?
Meanwhile, the administration's mortgage modification program -- the
program that inspired the Santelli rant -- has, in the end,
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.