David Cay Johnston
David Cay Johnston, The World Economic Forum opened in Davos amid choruses of central bankers and economists calling for governments to cut spending.This message of austerity is like the call of the ancient Sirens, whose music lured sailors to shipwreck.
We should take a lesson from Odysseus, who poured wax into the ears of his crew and had himself lashed to the mast of his ship to resist the Siren call.
Austerity supporters are selling the idea that governments, like families, must cut back when income shrinks. But economically, governments are not like families.
Firing teachers, cops and government clerks will, for sure, reduce public spending. But budgets, like the song of the Sirens, are only part of the story. Listen only to the alluring lyrics and, like the many voyagers before Odysseus, we will suffer disastrous consequences – in our case falling incomes and worsening economies.
The full economic story begins with this principle taught to every economics student: spending equals income and income equals spending. Cut spending and incomes must fall; cut incomes and spending must fall.
Those who disagree with this say that only private spending can create wealth and that government spending is inefficient. I think the first argument is wrong, but the second is often true, which is why citizens need to pay close attention to their government.
When private spending shrinks, then either government spending must grow to make up for it or the other side of the equation, income, must shrink.
If we increase spending today by borrowing, we create a claim on future income. Families with debt must divert part of their future income to interest and principal to service that debt or go bankrupt. Governments are different, provided they have monopoly control of their currency. By definition, no sovereign government can ever go broke in its own currency.