Saturday, June 2, 2012

The twice-wrong analogy

Paul Krugman has been hammering away at the economy as household analogy for ages now, pointing out that the idea of belt-tightening becomes problematic when applied to groups that include both debtors and creditors. I'm wondering, though, if he's wrongly conceding a comparably serious point.

Let's assume we have a household that is running in the red because one of the breadwinners has been laid off. Also assume that the household has been offered a line of very cheap credit, virtually zero interest in real terms. Consider the following purchases:

1. Long deferred car maintenance;

2. Having some cavities filled;

3. Taking a career-relevant training course;

4. Buying a new suit for interviewing;

5. Getting a really big TV;

6. Vegas.

Let's group these in twos and think about the following choices:

A. Take a loan to cover 1 and 2;

B. Take a loan to cover 3 and 4

C. Take a loan to cover 5 and 6

D. Don't take a loan.

I could imagine a heated argument over the merits of A (the cost of putting these things off is far more than the interest) and B (If these purchases lead to a job they will have paid for themselves many times over), but I can't imagine a good argument for D.

It is certainly possible to find government purchases that resemble C but most of the proposed spending we've been talking about recently (infrastructure, education, research, public safety) seem to fall alongside A and/or B. Advocates of austerity could try to argue that these things don't have the potential to save money in the long run, but that's not what we've been hearing. Instead we simply get the argument that, even with essentially zero-interest loans, a household in the red should never borrow money.

What's worse, people take this seriously.

Along these lines, check out the following from Frank Rich via Thoma:

... The most important single step toward a brighter future is to repair our economy as soon as possible. And one of the surest ways to do so is a large and immediate infrastructure refurbishment program.
This path would not require Republicans to concede the merits of traditional Keynesian stimulus policy. Nor would it require them to abandon their concerns about the national debt. In short, the philosophical foundation for an agreement is already firmly in place.
If it doesn’t happen, the coming political campaign will provide a golden opportunity to learn why. At the inevitable town hall meetings, voters who are tired of gridlock should ask candidates when they think that long-overdue infrastructure repairs should begin. The only defensible answer is “Right now!” Candidates who counsel further delay should be pressed to explain why.

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