Referring to the Jerry Seinfeld quote below, how is the economy any different?
Think back to the Paradox of Thrift mentioned in the 7/14/13 post on "Effective Demand" .....
The paradox implies that more saving will actually hurt the economy, causing national income to fall, and ensuring that households (in the aggregate) will earn less and thus, save less. The intent to save more (i.e., consume less, pay off debt, etc.) means that aggregate saving falls so people, in general, end up saving less, thus the paradox.
It's the same story with austerity programs. The intent to reduce the deficit (by raising taxes, lowering government spending, or a combination of both) will reduce aggregate demand/spending and hurt the economy by causing national income (and output) to fall. Since deficits automatically rise during recessions*, policies to reduce deficits and debt will actually cause the deficit to rise. Same paradox!
* see post above
