Krugman on austerity II

Last week I blogged about Noble-prize winning economist Paul Krugman's recent posts on the austerity madness gripping developed nations. His latest New York Times column is more on the same theme. Yes, there were unsustainable (private) debt levels before 2008. Yes, the bursting of that debt bubble is forcing debtors to cut spending. But the continued moralisation of that debt is driving us all into depression:

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 this in turn means a stagnant economy with low demand and high unemployment. You can see it in the US and in the UK. And you can see it right here in New Zealand. National's insistence on cuts, cuts, cuts is causing economic stagnation. Their refusal to stimulate the economy is keeping people out of work. Having been left in a perfect position by Michael Cullen to ride out the recession, they have squandered that opportunity, and are instead driving us deeper into a hole - exactly as they did last time they were in power (Ruth Richardson's vicious cuts prolonged the early 90's recession, for the same reason). Far from being competent economic managers, they are the last people you should want to be in charge of New Zealand when the economy is weak.