I have long pondered this wearisome truth, and this week Paul Krugman has a column restating this paradox:
The years leading up to the 2008 crisis were indeed marked by unsustainable borrowing, going far beyond the subprime loans many people still believe, wrongly, were at the heart of the problem. Real estate speculation ran wild in Florida and Nevada, but also in Spain, Ireland and Latvia. And all of it was paid for with borrowed money.
This borrowing made the world as a whole neither richer nor poorer: one person’s debt is another person’s asset. But it made the world vulnerable. When lenders suddenly decided that they had lent too much, that debt levels were excessive, debtors were forced to slash spending. This pushed the world into the deepest recession since the 1930s. And recovery, such as it is, has been weak and uncertain — which is exactly what we should have expected, given the overhang of debt.
The key thing to bear in mind is that for the world as a whole, spending equals income. If one group of people — those with excessive debts — is forced to cut spending to pay down its debts, one of two things must happen: either someone else must spend more, or world income will fall.
The impulse of the moralizers -- tighten our belts, forget about excesses that were bad for our souls anyway, concentrate on spiritual things rather than money -- is, in economic terms, a disaster. The moral impulse is to think that the severe recession is something we deserve for our past profligacy, something we can get through only by buckling down. It is a test of our character that we must pass before we deserve relief. You can see this in particular in comments on the notion that the Federal Reserve could help us out by just printing money. People who don't like the idea are not really arguing about the economics of the money supply, they are just sure in their guts that "tricks" don't work and there is "no easy way out." But both economics and recent history argue that the moralists are wrong. The recession will end when people stop tightening their belts and start spending money again. From what I read it seems quite likely to me that "tricks" like deficit spending and raising the money supply really can help the economy. I have the sense that our whole economy is a trick, in which unsustainable spending and foolish investment somehow keep the machine of growth going.
Perhaps it is fortunate that the impulses driving us to spend, to acquire, and to flaunt are so strong, because we don't know how to make the world work without them.