Thrift is a Virtue. Just Not Today! Debt is Bad. But Keep Spending!

President Obama found his voice on health care. Now he needs to find his voice on economic policy. The paradox of our recovery is that we need more public debt and greater consumer spending to grow out of the recession, but lower public debt and more responsible consumer spending to avoid the next crash. But how do you actually put that into words?

The president has struggled to do so. He's said things like "if families are tightening their belt, the government should do the same," which is utterly backward (with private demand slagging, government spending is growing). Obama likes to focus on the long arc of reform, but many reforms we need on that long arc are unattainable in the short term.* It's difficult to acknowledge that times of crisis call for crisis policies -- like record deficits -- that would normally appear irresponsible. But the key is to explain that our short-term economic policy and our long-term economic policy are not the same, and should not be. Sick patients take potent medicines that healthy patients shouldn't. And that's a good thing! You don't want to slam good strong drugs, but you do want to discourage refilling that prescription indefinitely.

A piece that reminded me of our unique position is this argument about consumerism's comeback in TIME:

The great recession was supposed to teach all of us one lesson. Debt is bad. If we were going to pull out of this, we were all going to have to lock up our wallets and focus on paying off our bills. And indeed the savings rate did initially turn up. It is still well above its low of 1% ... While we might cheer a drop in savings in the short-term, in the long-term, savings has no real downside.

So the recession's lesson is clear: debt = bad. What's not clear is when we should learn the lesson. The paradox of thrift states that widespread saving during a recession hurts the economy and leads to lower total savings. Today the government is spending more to encourage Americans to spend more (see graph below). Tomorrow the government wants to spend less and encourage Americans to save more. This is paradoxical stuff, and it's not easy to fit into a sound bite. But it's crucial that Obama explain that the only way to properly view American economic policy is with bifocals: our near and far term goals are distinct, but they must be made clear.

[Figure C]

*Just looking at our tax policy, it might be wise to slash the mortgage interest deduction, but doing so today would hurt the weak housing market; and it might be wise to eliminate the state and local tax deduction, but doing so today would hurt our weak state budgets...