I’m being serious in this post (for once), I want someone to explain exactly where Krugman is coming from when he writes:
[Martin Wolf is] reacting to Cameron’s statement, semi-withdrawn but not really, that what Britain needs is for everyone to pay down debt, said in obvious obliviousness to the fact that if everyone cuts spending at the same time, income must fall.
But then, this kind of obliviousness is very widespread, and my experience is that if you try to point out the problem — if you try to explain that my spending is your income and vice versa — you get a belligerent response. Y=E is seen as a political statement, which in a way it is if one side of the political spectrum insists on believing things that can’t be true.
Krugman seems to be saying (though again, he’s a slippery fish) that if everyone pays down debt, then total spending must fall. Do people agree with me that that is not necessarily true, or is that indeed the (stronger) claim?
Let me restate my question in different words: I agree that if everyone reduces spending, then (nominal) income has to go down. However, Krugman above leads us to believe (without actually saying it), that if everyone tries to pay down debts, then we get a drop in spending (and hence a drop in nominal income). So is that part of what he considers to be an accounting tautology too? I.e. just how “stupid” does Cameron have to be here? Is he really ignoring accounting, or is Krugman conveniently slipping in an empirical assumption or a tenet of Keynesian models, that Cameron need not endorse?