The Paradox of Thrift

How about this conservative idea of a balanced budget amendment to the constitution, forcing the government to spend no more than it takes in each year in revenues? Do you think this is a good idea? The argument is that the government should behave just like an individual, or a family, in limiting its expenses to no more than its income. Seems like a good idea if you don't think about it too much.

There is an economic phenomenon known as the Paradox of Thrift, attributable (I think) to John Maynard Keynes. The paradox is that saving by persons and families, in order to improve their individual financial situations, hurts the economy as a whole by reducing consumption, which comprises 60% of GDP. Decreased consumption decreases business income, so businesses contract, laying off employees. This decreases incomes of individuals, which decreases consumption even more. The paradox: what's good for the individual, when done on a mass scale, is bad for the economy as a whole.

We are in this situation now (mid 2011). There is high unemployment; people are spending less; businesses are producing less, and not hiring; decreased personal and business incomes means decreased tax revenues for the government. This seems to require cutting government spending, which is demanded by conservatives. But this will only make this situation WORSE by destroying public jobs and providing less government stimulus to the economy. This will contribute to the downward spiral of jobs, spending, production, tax revenues, and so on. Cutting government spending in a recession is the worst thing that we can do. We need the opposite--to increase government spending to stimulate the economy, to increase money flow, to prod consumer demand, to in turn prod business production.

If we want to see a major recession/depression/economic meltdown, let's do what the conservatives want, and cut spending to the bone. Further, let's set it in stone by with a balanced budget amendment, which will deprive government of one of its main tools (fiscal expansion) for combatting recession.