Saturday, April 23, 2011

Haggling Over the Price of the Hose

or "The Real Liquidity Trap"

I don't know whether anyone has heard, but there's supposed to be some kind of 'debate' happening amongst federal officials about how best to go about solving the U.S. 'debt crisis.' Sorry if the scare quotes identify me as an avid follower of Krugman's blog, but I am. I'm also trying to put the most charitable face on the Conservative position here as I can. To that end, try the following thought experiment.

Suppose your house is on fire. And, suppose a friend is willing to lend you water, even though you owe him quite a bit for the water you've already borrowed. Why might you shy from borrowing it now? Well, maybe you think that borrowing this water now will harm you in a time when you're in more dire need (a fire you really can't handle yourself, say), and in such a time the friend won't be willing to loan you any water, since you owe him so much as it is. So, spake the water-Conservative, thankyouverymuch, but I'll put out this particular fire on my own. I appreciate the offer, but save your water for later.

Okay, that seems sensible to me. Why borrow when you can pay for it yourself, already?

Here's my question, though. Doesn't the growth of the present fire, itself - and not necessarily the fact that you owe your friend a lot already - make your friend less likely to lend water to you in the future? That is, the growth of the present fire increases the value of the water-debt he holds on you already, since the growth of the present fire increases the risk of your defaulting on that debt (from your house burning down). Given this fact, isn't the water-Conservative's worry about future water-loans unfounded, if you can't, in fact, put out the current fire?

So, the parallels to the current debate seem pretty obvious, here. And, my suspicion is that the difference between (water) Conservatives and (water) Liberals is a disagreement about just what sort of fire it is we're fighting, and thus, just which sort of strategy will best combat it. If you're the Conservative, you think the fire is the threat of future availability of credit (after all, if we had an assurance of timelessly unlimited credit, we could borrow water like drunken sailors). If you're the Liberal, you think that the fire is joblessness and lost productivity. For my part, though, it seems like there's a sense in which fighting the Liberal's fire also fights the Conservative's fire: when you have increased employment and productivity, you generate increased tax revenues. But if what you're worried about primarily is the future availability of water, you can fight only the Conservative fight, since you can't borrow water to fight the fire of joblessness and productivity. But then, maybe you also believe in cutting in order to create jobs - tantamount to praying to the rain God, as near as I can tell.

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