Penny-Wise, Pound-Foolish

Brad Delong, Mark Thoma,  and Paul Krugman on President Obama's most recent serial surrender to begger-thy-country hawks.

Here's Bernard Mandeville's commentary on his Fable of the Bees (which provided an allegorical account of how the side effects of private "vices" (read "consumption" or "aggregate demand") are a public good) courtesy of JM Keynes (General Theory, Chapter 23, VII)

As this prudent economy, which some people call Saving, is in private families the most certain method to increase an estate, so some imagine that, whether a country be barren or fruitful, the same method if generally pursued (which they think practicable) will have the same effect upon a whole nation, and that, for example, the English might be much richer than they are, if they would be as frugal as some of their neighbours. This, I think, is an error.

...

The great art to make a nation happy, and what we call flourishing, consists in giving everybody an opportunity of being employed; which to compass, let a Government’s first care be to promote as great a variety of Manufactures, Arts and Handicrafts as human wit can invent; and the second to encourage Agriculture and Fishery in all their branches, that the whole Earth may be forced to exert itself as well as Man. It is from this Policy and not from the trifling regulations of Lavishness and Frugality that the greatness and felicity of Nations must be expected; for let the value of Gold and Silver rise or fall, the enjoyment of all Societies will ever depend upon the Fruits of the Earth and the Labour of the People; both which joined together are a more certain, a more inexhaustible and a more real Treasure than the Gold of Brazil or the Silver of Potosi.

And here's Keynes comment:

No wonder that such wicked sentiments called down the opprobrium of two centuries of moralists and economists who felt much more virtuous in possession of their austere doctrine that no sound remedy was discoverable except in the utmost of thrift and economy both by the individual and by the state. Petty’s “entertainments, magnificent shews, triumphal arches, etc.” gave place to the penny-wisdom of Gladstonian finance and to a state system which “could not afford” hospitals, open spaces, noble buildings, even the preservation of its ancient monuments, far less the splendours of music and the drama, all of which were consigned to the private charity or magnanimity of improvident individuals.

Apparently we are doomed to repeat history, except this time the Wall Street "knaves" get to shop and party while the rest of us get to be prudent, austere and (presumably) moral all the way to the soup kitchen. I'm sure they'll figure out a way for us to pick up their tab when they run the economy into the ditch again, too.

And you thought economics wasn't a morality play....

Comments

[steve from virginia]

Hmmm ... well, there is morality and practicality. Let's look at the latter:

- At no time can all persons can be either savers or spenders. The situation in the US is an overhang of spenders (with personal savings an artifact of defaults). If all spend, someone elsewhere outside the US must save. China? Germany? How is this imbalance good economix?

In deflation, spending is a slow form of suicide by means of money. Money has more value than commerce. That is what deflation is. Spending in deflation is throwing away something of value for junk, basically.

In Depressions -- which are a form of class warfare -- spending BY LABOR is the simplest way to be destroyed by capital. The only way for persons of small means to prevail in Depressions is to hold onto their money, even if they starve to death as a consequence! Their heirs and assigns will then have the money to be withheld from capital.

In deflations, capital perishes without flows of funds. Capital management costs are sticky, after all ...

Since our current 'travails' are the consequence of the waste- based economy run amok, cutting spending is the inevitable consequence of resource constraints.

Add together: overseas account imbalances, deflation, a class war that requires thrift as a strategy to survive and win, and the end of the waste- based economy.

Thrift is in, Baby, let's dance!

http://economic-undertow.blogspot.com/2010/11/bits-and-pieces_29.html

[steve]

I think you are overreacting a bit. True, this is a trivial cut, and we need a combination of tax increases and spending. However, I think Interfluidity got this right a while back. Like it or not, many people do suffer from resentiment when they feel that others are exempt from the travails we all suffer. This small gesture will mean much more that it is really worth. Besides, government workers really have been exempt from the decrease in pay many others have seen. FDR understood that symbolism matters.

Steve

[Maxine Udall (girl economist)]

Steve, a better symbolic gesture would be to allow the Bush tax cuts to expire on the richest 2% of Americans. If we're all in this together, they can take a cut, too. And it would be better economics.

[steve]

Well, yes, but one does not exclude the other. I hope he makes a strong stand on that issue. Having taken this issue up first, he now has some credibility on the debt issue and can address it from that POV.

Steve

[rjs]

i tend to agree with steve, maxine, if only becasue it was a politically smart move...you & krugman can see it as a cynical ploy, but most americans if they hear about it at all will take it at face value....with this trivial move he defuses most of the right wing big guvmint democrats ranting that has been the underpinning of the opposition over the past months...i'll bet polling numbers would show something north of 80% in favor of such a freeze on guvmint workers...

of course, it's lousy economcs, and bad timing (he should have pulled this before the midterms), but it's likely that the rethuglican congress would have enacted something like this come january anyhow...