Ray Dalio, founder of Bridgewater Associates, has created a short video that explains the economy. If you haven’t brushed up on macroeconomics in a while, or have been watching Fox News a lot, it’s definitely worth a look.
Of particular importance is the section around 18 minutes in when Dalio discusses the effects of austerity. Counterintuitively, he notes, austerity actually increases debt burdens by lowering income. As I’ve noted before, this is the reason why sequestration in the U.S. will actually increase the deficit, not decrease it. By stunting economic growth and preventing people from getting back to work, policies that dramatically decrease discretionary spending create the need for more spending on automatic stabilizers (e.g. food stamps) and reduce revenues.
Dalio argues for a “beautiful deleveraging,” or reducing debts through a combination of redistribution, reduced spending, debt restructuring, and printing money. The only thing I would add to the video is that there is no reason for corporations, individuals, and governments to all pay down their debts at the same time. Since the government can take on debt at rock-bottom interest rates during the recovery, it makes sense for the government to spend money on unemployment and make-work programs which will allow the private sector to deleverage and then begin consuming and investing again. Then, when revenues are up and the economy is chugging along, the federal deficit will decrease.
This is what would have happened during the late 90s and early 2000s, except that Bush came in and cut taxes and started two trillion-dollar wars. Oh well.