Consider if you've been living the high life based on borrowed money. At some point, you decide to go on an "austerity" program, and cut back the spending so you are no longer borrowing.
In order to pay back the debt, your standard of living is going to necessarily drop below that of what it would be if you'd never started the borrow and spend, and certainly would be far less than it was when you were living on borrowed money.
Does that mean your austerity program is a failure?
The analogy between governments and people doesn't work, not least because governments are immortal and can print their own money.
However, if we choose to ignore this for a moment, there's a good counter-argument: the way to get rid of debt is to pay it back, and the way to pay it back is to work more and invest wisely. The individual or household that needs to pay off some debt would do better if, say, the people in the household got jobs (if they don't have them) or extra hours at work (if they do). Allowing the unemployment rate to rise as it has done in countries operating "austerity" doesn't fit that analogy at all.
My point is not that the above argument is correct, just that it's possible to argue both for and against austerity using "intuitive" arguments based on analogies with households, and these are rarely correct. That said, neither are most of our mainstream economic theories! (At least some of them must be dead wrong, as they can't all be right).
> governments are immortal and can print their own money
The part with governments "can print their own money" is actually incorrect for many European countries. That is the main problem for the PIIGs right now.
Why is this downvoted? The statement is correct. You can argue if it's the main problem, but it's certainly a problem. The countries in the Euro zone cannot print their own money at will.
In many developing countries, there is no option to work harder, get another job, or work at all. The opportunities just do not exist, and the cycle perpetuates. This is why the New Deal was so necessary, it was a jumpstart to the economy by getting people back to work anyway possible.
> governments are immortal and can print their own money
The part with governments being "immortal" is actually incorrect. The fact is that for example UK paper money is just that, colored paper, when it comes to paying up debts taken in foreign currency. A couple of failed States come to mind as examples, like Germany in the early 1920s and Argentina in the late 1990s.
Imagine a grandmother taking a loan for her grandchild so they can have a car to drive to work. The household income increases as a result.
If she stops paying the loan the car gets repossessed. The grandchild can no longer earn money. The household income decreases.
The grandmother does this for all her many grandchildren. The grandchildren all work and the family become rich.
In our modern economies the now-wealthy grandchildren refuse to pay the grandmother back, but they agree to pay the interest on the loans. She doesn't push it because her house is big and busy and her family have a lovely lifestyle.
Should she default and let the cars be repossessed or would it be better to get her spoilt grandchildren to start paying back the loans?
This is more like, you go on an austerity program which also includes your train ticket to work. So you are spending less money but there's no money available to generate more - because you are not working you are not generating money and so your debts are increasing.
The argument in the article seems to be that reduced government spending has depressed the economy, which in turn has killed its income from taxes. So, yes, they reduced spending, but they reduced their income at the same time, so there's no net benefit.
But scrounging poors are literally dying on their feet, so I'm guessing that's seen as a win.
Hyperbolic? Maybe a little. But I currently live in a country where people are dropping dead after failing "medical" tests for incapacity benefit and being told to get a job.
Yes sure, common sense right? But the deficit has actually increased. So not only are they targeting the most vulnerable, but their measures aren't even working.
Um. All money is imaginary. Money is money if we both agree that it is money.
So I don't really know what you mean by switching away from imaginary money. That's not actually possible to do. I guess you could go with the resource-based economy guys, but that's not actually money anymore.
Erm no. Money is a token in value exchange transactions. If a government rides on throwing in tokens not backed up by value in the economy, that is not going to last.
Ah. What you're saying is that the money will have less value. I got distracted by your weird usage of imaginariness. So this isn't about money; it's about value.
Yes, austerity results in lowering the value in the economy, which in turn makes it difficult to back money with said lack of value.
No, what I am saying is that the borrowed money are not backed by value in the economy, and that returning them has to be painful.
Now I know Krugman says the value should appear in a puff of smoke once money is thrown in thin air, but that's more a matter of personal belief. Did it help curing the Great Depression? Perhaps; however there are numerous examples of where societies bankrupted themselves with borrowing and spending.
The real question is: why were you borrowing in the first place? Your story here indicates you assume the initial borrowing happened because we were "living the high life", purchasing luxuries we simply couldn't afford on our incomes, while our incomes remained steady.
In the real world, what has almost universally happened is that our incomes dropped, and we started borrowing to maintain the same standard of living we always had. "Austerity" thus involves a double-whammy: the initial drop in income from straight-up income reduction plus a further drop in standard of living from debt service.
Then we notice that the same guy who owns our credit card and our mortgage is the one who cut our salary. And that's when someone calls me a Communist ;-).
If the government can print money, then yes, it is different, but only in that the government can keep printing more money rather than needing to convince lenders to loan it more.
It can't change the fact that if you live beyond your means long enough, you run out of means one way or another.
The crucial difference is not the one about printing money. In a country of sufficient size, most of the economic activity is exchange within the country. This is not true of a family, so the math is not the same. In the case of a country, it becomes recursive and difficult to understand, hence all the arguments.
> Consider if you've been living the high life based on borrowed money. At some point, you decide to go on an "austerity" program, and cut back the spending so you are no longer borrowing.
I'm confused about your scenario. Are you continually borrowing, or are you living off a finite quantity of borrowed money? Does an income exist, and if so, where does it come from? Who are you borrowing from, and why did they give it to you in the first place and in what form do they expect it back? Are you obligated towards anyone besides yourself, such as children, aside from the established debt?
In order to pay back the debt, your standard of living is going to necessarily drop below that of what it would be if you'd never started the borrow and spend, and certainly would be far less than it was when you were living on borrowed money.
Does that mean your austerity program is a failure?