What are people saying about austerity, the 2010 word of the year?
According to Dr. Econ at the San Francisco Federal Reserve, households are demonstrating austerity by saving more and borrowing less. On the one hand, living within our means is good. But on the other, called the paradox of thrift, when everyone spends less, the economy tends to contract.
Characterized by small businesses borrowing less, banks lending less, and multinationals hiring abroad rather than at home, austerity helped businesses buoy profits. On the other hand, though, we need the Keynesian “animal spirits” that are starting to surface for economic growth and less joblessness.
Finally, just mention government borrowing and the word austerity pops up. Greece needs to cut back. Ireland needs to cut back. German austerity should be copied. As for the U.S., though, austerity was synonymous with debate. On the one hand, continuing to increase the deficit can mean unmanageable debt and future inflation. But on the other hand, cutting back too much, too soon, could reverse our economic recovery.
The Economic Lesson
Our last economic lesson of 2010 returns us to Harry Truman saying, “Give me a one-handed economist. All my economists say, “On the one hand…on the other…”