Economic Law is Economic Law

By Adam Pearson

The single most surprising commentary that I constantly hear about the economy is that the government should borrow more to prop up economic activity. This is based on the notion that spurring consumption should be the goal of policy. I find it so surprising because it really doesn’t take too much reasoning to understand the irrationallity of this position.  

Let us first understand that the laws of economics are the laws of economics. They don’t change just because the activities of the economy as a whole are being discussed instead of the activities of just a single person. If borrowing to consume is inadvisable for an individual it is equally inadvisable for an entity that purports to represent hundreds of millions of individuals. It is similar to the effects of cigarettes. The ill effects of smoking cigarettes apply whether a single person does it or a million people do it.

Imagine Gary. Gary is a regular guy. He has $10,000 in the bank. He has credit cards in his wallet. His monthly bills, including food and entertainment, come out to $2,000 per month. The place where he works pays him exactly $2,000 month, after taxes. One day Gary gets fired. “Whew! I am glad that I have that $10,000 in the bank”, thinks Gary. Indeed, Gary will be able to support himself for 5 months with the money that he has in the bank, assuming he maintains his current level of spending. Five months pass and Gary still hasn’t found a job. To avoid starving and living without shelter, Gary starts covering his costs with his credit cards. He runs up $10,000 in debt over the next five months. Finanlly he lands a new job, earning $1,500 per month.

Being a wise and caring friend, how would you advise Gary in this situation? What would make him truly better off? 

Would you a) advise Gary that until he starts making more he should do everything he can to lower his living costs, move in with a roommate if necessary, cease going out to bars and restaurants as frequently, replace premium cable with basic, try to pay back the credit card debt, and in general consume less?

Or would you b) inform Gary that consumption is good for the economy and tell him that the best way to improve his situation is to increase his spending by any means necessary, advise him to get as many new credit cards as he can, stimulate his own situation by moving into a bigger house, going out more often, buy a new car on credit, and in general do everything he can to consume more?

If you believe that borrowing to stimulate consumption is the key to getting an economy out of a recession, to be logically consistent, you would have to advise Gary to follow policy B. Coincidentally, you would be of the same persuasion as almost all economists and politicians alive today.

I, on the other hand, being a good and wise friend, would certainly advise policy A. It is obvious to me that borrowing to consume will make life so much worse for Gary. Eventually, he’ll find himself in a situation where there will be no way out. Sooner or later all of his money will have to go towards paying back debt. He’ll have no money for a house, no money for food, and no money for fun. He’ll be dead broke. It would break my heart to see old Gary, or anybody for that matter, in such dire straights.

As I stated in the beginning: economic laws are economic laws. The rules that apply to Gary don’t change just because there are hundreds of millions of people involved. The rules also don’t change just because the government borrows on behalf of all the Garys out there in the world. Borrowing to prop up consumption sooner or later leads to the same results: going flat, dead broke.

It doesn’t have to come down to that though. Just as I’d hate to see my old friend Gary go down that path, I’d hate to see hundreds of millions of Americans taken down that path by their government. The first step is to be honest with ourselves. Although austerity ain’t the funnest thing in the world, it is the right remedy for certain situations. We find ourselves in just such  a situation. The second step, of course, is make our government aware of how we feel. I don’t know how to go about doing that.

In the example above, things would probably only get better for Gary after he’d adjusted his life to his new situation, not before. For whatever reason, things start to get better once we conform our lives to reality. Ingoring reality is almost always a recipe for disaster. In the final analysis borrowing to stimulate consumption is just that: ignoring reality.

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