The Swabian housewife revisited

In theory if every household would cut back and also the government, the economy would in fact shrink further, and it will happen for a period of time. Currently I am reading the story of Gerard Heineken. He started the Heineken brewery in the mid eighteen hundreds. Holland had gone through the Golden Age in the 1600 -1700’s, but during Gerard Heineken’s lifetime was in shambles. He was one of the creative, persistent renovators of his time. His grandson, Freddy Heineken, took the company to a new level right after WW II. He looked toward American marketing techniques. Heineken is still one of the largest imported beers in America.

It seems that America hates economic downturns more than anything. It is good at pursuing visionary ideas. The question is: At what cost? After WW II America visualized and created the Marshall Plan to get Europe back on its feet. This was very successful.

But if we look at the current economic situation, a lot is based on greed in my opinion. I just came back from the Czech Republic. It also was affected by the 2008 recession, but it did not go into the risky home loans, like America. Fewer people lost their homes as a result. People did loose their jobs, but not to the extend we see in America.

Should we go further into debt?  Will it be for the right reasons?

The Swabian Housewife

We are warned from time to time, that the US deficit is getting out of proportion. How long can it increase before the economy collapses? I don’t believe anyone knows, and Obama or any prior president, do not seem to be bothered. What do economists do to manage it? From the examples below you can see that we oversimplify this issue, but what then?

 

  1. The Swabian Housewife. “One should simply have asked the Swabian housewife,” said German Chancellor Angela Merkel after the collapse of Lehman Brothers in 2008. “She would have told us that you cannot live beyond your means.”
    1. This sensible-sounding logic currently underpins austerity. The problem is that it ignores the effect of the housewife’s thrift on total demand. If all households curbed their expenditures, total consumption would fall, and so, too, would demand for labor. If the housewife’s husband loses his job, the household will be worse off than before.
    2. The general case of this fallacy is the “fallacy of composition”: what makes sense for each household or company individually does not necessarily add up to the good of the whole. The particular case that John Maynard Keynes identified was the “paradox of thrift”: if everyone tries to save more in bad times, aggregate demand will fall, lowering total savings, because of the decrease in consumption and economic growth.
    3. If the government tries to cut its deficit, households and firms will have to tighten their purse strings, resulting in less total spending. As a result, however much the government cuts its spending, its deficit will barely shrink. And if all countries pursue austerity simultaneously, lower demand for each country’s goods will lead to lower domestic and foreign consumption, leaving all worse off.