Paying down debt
Warren Meyer at Coyote makes a familiar argument against the stimulus : At the end of the day, businesses and individuals have a felt need to deleverage. That is going to cause a recession, end of story. The Congress’s and Obama Administration’s obsession with short-circuiting this sensible desire to reduce debt is not only counter-productive, it is offensive. Banks are sensibly trying to strengthen their balance sheets, but the government wants to stop them. Individuals are trying to cut back on spending, reduce debt, and save more. Again, the government wants to stop them, by going to debt and spending for them if consumers won’t do it on their own. This sounds intuitively sensible, but is it correct? As often is the case, a simple model sheds some light on the argument (retrospective note: the model is simple, but the analysis turned out longer than expected. I still think it's worth reading). Imagine a very small economy with just two people in it. A is a baker and B is a b...