A few hours ago I read a message from a friend who graduated a few months ago with a graduate degree, but after months had still not found a job. I wanted to write down a few thoughts.
Once upon a time dad and I were at our weekend trailer by the river. We opened the freezer, and inside was a bottle of water, and it was still liquid. Dad shook it, and almost instantaneously the bottle froze solid. The water got cold enough to freeze a long time ago, but it needed a little nudge to kick-start the freezing process.
This is an example of what’s called a “phase transition”. Physics is filled with such things. It’s where most of the interesting science takes place. They mark points where one sets of physical laws stop being valid and new laws take over. What we’ve been through the past few years is an economic phase transition. Our economy got filled with too much debt, someone shook our bottle, and suddenly the rules changed.
One of the things you see whenever there’s a phase transition is that the new rules often seen extremely weird or even backwards compared to the old rules. In grad school my specialty was black holes. Inside a black hole, “space” becomes time-like. “Time” becomes space-like. Even physicists have a hard time wrapping their mind around that. It seems paradoxical and contrary to common sense. But that doesn’t mean it isn’t true.
Similarly, behaviors which are good in normal times (like austerity and saving money) can have bad outcomes. For instance, if you have a dollar, you can choose to consume it or save it. And every dollar you want to save requires someone else to borrow it to consume something they want. That works great in normal times, because there are more borrowers than savers.
But now, everyone is in debt up to their eyeballs and desperately trying to save money because they can’t count on their house, their job, or their 401k. When *everyone* tries to save money, they can’t because there aren’t enough borrowers to go around. Consumption falls because people are trying to save, and the economy gets smaller. The net effect is that when everyone tries to save, everyone ends up poorer than before. That’s called the Paradox of Thrift.
Today, even with interest rates at 0%, we can’t attract enough borrowers. It is estimated that the interest rate would have to be below -5% to attract enough borrowers. But who in their right mind would loan out $100, expecting to get only $95 in return? No one. That’s the economic black hole we’re trapped in.
The only way out is for someone to step in and act as the borrower of last resort. That’s why the federal government is doing so much deficit spending, because there is a build-up of savings with no place to go. The fiscal conservative in me *likes* this kind of deficit spending, provided it’s short-term. It allows other people to save their money, it props up the economy, puts people back to work, and it lets our government do a lot of necessary and overdue infrastructure investment while interest rates are near 0%.
Yes, government will eventually have to tighten it’s belt. It’s actually long-overdue. But right now is a very dangerous time to start. It’s like trying to jump-start someone’s heart while they laying in a pool of gasoline.
The problem is that some politicians are still playing by the “normal” rules and are determined to force our government into austerity. This would actually be wonderful policy in normal times, but can be catastrophic in our current situation. Government deficit spending is fueling our recovery from depression.
Imagine you’re trapped in a black hole. You turn on the warp drive to escape, get half-way out, and then someone decides to turn it off because it’s burning too much fuel. You end up falling farther into the black hole than when you started, and now you have even less fuel to try to get back out again.
That’s the danger of premature austerity, that the economy will end up back where it was, or worse. It happened to the USA in the Great Depression, and appears to be happening to Ireland and Great Britain as I speak.
I know this type of behavior doesn’t seem normal. Saving money should make you richer, not poorer. Government deficits should be bad, not good. That’s why it’s called a “paradox”, because it’s something that’s not normally true, but occasionally it is. Some politicians are determined to play by “normal” rules when we aren’t in a normal world right now. Premature austerity will substantially worsen unemployment (I’ve heard estimates of 700,000 additional jobs lost), as well as prolong our country’s misery longer than necessary.
So read, think, and act. Call your congressman. Tell them that unemployment is a more immediate concern than deficits. Some of them are putting ideology in the way of fact. A lot of them actually know better, but are cowed by the squeaky wheels in the crowd. But maybe, just maybe, if enough people read this and agree, we can shake Congress’s bottle, and change the rules again.