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Imagine you were investing in a company (instead of a country) that was taking this course of action: already in debt, stagnant sales, and had just doubled down

Imagine you were investing in a company (instead of a country) that was taking this course of action: already in debt, stagnant sales, and had just doubled down on their debt to try and get out of it. Would you invest in that company? Same analogy applies to individual people. Imagine a friend of yours who has a bunch of debt, is having trouble earning enough money, and just took on a bunch more debt for some new ventures which he hopes will pay it all back. Most people would tell their friend the prudent thing to do is spend less money for a bit, pay down your debt until you get back on your feet. Not open up some new credit cards. This is probably why people have trouble understanding the "go into more debt to get out of debt" approach.

gahahaha 16y ago
That is probably correct. The thing is, no amount of experience meeting a payroll helps you understand issues that are critically affected by the way things add up at a macro level. Businesses are open systems; the world economy is a closed system, with feedback effects that are crucial but play no role in ordinary business experience. In particular, an individual businessman, no matter how brilliant, never has to worry about the fact that total income equals total spending, so that if some people spend less, either someone else must spend more, or aggregate income must fall. This is why we have a field called macroeconomics. Unfortunately, the hard-won insights of macroeconomics are being rejected right now in favor of visceral feelings. And we’ll all pay the price.
- barmstrong 16y ago
  I read the first paragraph and don't really understand your point. There are multiple countries competing in the world just as there are multiple companies. I'm not sure how it being open/closed makes any difference. In any event, it's not really fair to claim all of macroeconomics is on your side here. Economists seem pretty divided on this one.
WingForward 16y ago
If I owned a company, now is exactly when I'd take on debt. Now, "stuff" (advertising, equipment, factories, employees) is cheap. Now, borrowing is cheap. Now is the time for a business to spend. The US government is more like a business than an individual. Both are interested in generating wealth rather than consuming it. But in the case of "my friend"...if he were looking to borrow in order to generate wealth, say buy a house for rental income, I would completely support him.
j_baker 16y ago
The thing is... The US government isn't my broke friend or a company to invest in. If my broke friend were to make lifestyle changes, it wouldn't affect thousands of jobs. Nor is it in danger of going out of business like a company that's in this state would be. That's not to say that a growing debt is a good thing. It's just that the worst recession since the great depression isn't the appropriate time to make cutbacks.
lyudmil 16y ago
There's a simpler way to look at the problem, which also demonstrates why your analogy doesn't work. If we went with your analogy, the best thing for everyone is for that company to fail and fail fast because it is a burden on the economy. I would assume neither you nor anyone in the world is willing to accept this scenario. Therefore, you have no choice but to try to save the company. The only question is how. The fact is that due to the housing bubble $8 trillion is gone from the economy. You can either choose to tighten the belt, save money and wait for the Americans that still have jobs to re-earn the cash, or you could try to borrow in order to invest and grow your way out of this. The reason I favor the latter approach is that the human cost of not spending money is too high in my opinion.

gahahaha 16y ago

That is probably correct. The thing is, no amount of experience meeting a payroll helps you understand issues that are critically affected by the way things add up at a macro level. Businesses are open systems; the world economy is a closed system, with feedback effects that are crucial but play no role in ordinary business experience. In particular, an individual businessman, no matter how brilliant, never has to worry about the fact that total income equals total spending, so that if some people spend less, either someone else must spend more, or aggregate income must fall. This is why we have a field called macroeconomics. Unfortunately, the hard-won insights of macroeconomics are being rejected right now in favor of visceral feelings. And we’ll all pay the price.

barmstrong 16y ago
I read the first paragraph and don't really understand your point. There are multiple countries competing in the world just as there are multiple companies. I'm not sure how it being open/closed makes any difference. In any event, it's not really fair to claim all of macroeconomics is on your side here. Economists seem pretty divided on this one.

WingForward 16y ago

If I owned a company, now is exactly when I'd take on debt. Now, "stuff" (advertising, equipment, factories, employees) is cheap. Now, borrowing is cheap. Now is the time for a business to spend. The US government is more like a business than an individual. Both are interested in generating wealth rather than consuming it. But in the case of "my friend"...if he were looking to borrow in order to generate wealth, say buy a house for rental income, I would completely support him.

j_baker 16y ago

The thing is... The US government isn't my broke friend or a company to invest in. If my broke friend were to make lifestyle changes, it wouldn't affect thousands of jobs. Nor is it in danger of going out of business like a company that's in this state would be. That's not to say that a growing debt is a good thing. It's just that the worst recession since the great depression isn't the appropriate time to make cutbacks.

lyudmil 16y ago

There's a simpler way to look at the problem, which also demonstrates why your analogy doesn't work. If we went with your analogy, the best thing for everyone is for that company to fail and fail fast because it is a burden on the economy. I would assume neither you nor anyone in the world is willing to accept this scenario. Therefore, you have no choice but to try to save the company. The only question is how. The fact is that due to the housing bubble $8 trillion is gone from the economy. You can either choose to tighten the belt, save money and wait for the Americans that still have jobs to re-earn the cash, or you could try to borrow in order to invest and grow your way out of this. The reason I favor the latter approach is that the human cost of not spending money is too high in my opinion.