John T.Harvey — Austerity Leads To... Austerity!

Ever since this blog started about two years ago, I’ve been repeating over and over that what the economy needs is more deficit spending, not less. This is so because:

* We have plenty of idle capacity....

* The reason for the idle capacity is the systemic inability of the private sector to generate sufficient demand to hire every willing worker....

* The extra demand necessary to bring us back to full capacity and employment can come from foreign countries (i.e., US exports) or the public sector (i.e., the government)....

* Not only that, but the federal government does not face a budget constraint....

* The basic accounting is inescapable: public sector deficits = private sector income and public sector debt = private sector assets....

And so it is high time for an outright rejection of the austerity model for recovery. It doesn’t make sense theoretically, there is no empirical evidence, and it is illogical. Are the groceries that air traffic controllers used to buy gone? Did we have less stuff to go around and therefore needed to reduce their income so their demand wouldn’t just lead to inflation? Of course not, the groceries are still there, they are just sitting unsold on the shelf. The air traffic controllers are worse off, the grocery store is worse off, the farmers are worse off, and air travelers are worse off. Nothing positive have been accomplished. Austerity accomplishes one thing and one thing only: austerity. We demand aggregate demand.

Forbes — Pragmatic Economics
Austerity Leads To... Austerity!
John T.Harvey | Professor of Economics, Texas Christian University