Austerity and the Paradox of Thrift

When everyone saves, no one spends, and the economy stalls.

   Thrift is a good thing. Except that when everybody does it, in its most extreme and widespread form, it can paralyze an entire nation.
   Austerity is a good thing. Except when everyone does it, the cycle of sales and purchases slows and the money flow stops.
   Money is the lifeblood of an economy. But when the lifeblood stops flowing, as with austerity and excessive thrift, the economic body suffers and sickens. The cure, then, is for someone to start spending again.
   In any economy, there are three main drivers to the money flow (the cycle of buying and selling): Consumers, companies and government. During a recession, consumers stop buying and companies stop investing. Consumers trim their spending because many have lost their jobs. Companies cut back because sales to consumers are down, and there's no point to expanding production or even maintaining the same level of output. The cycle thus feeds on itself and continues downward.
   Austerity by a family or even a household of just one or two persons is justified by its lack of income and fear of worse times to come. A company scales back production as sales decline, justified by the idea that there's no reason to produce if few are buying.
   On a small scale -- an individual household or a single company -- this scenario is appropriate. But on a regional or national scale, this same scenario becomes a self-perpetuating disaster.
   So if consumers and companies cannot or will not spend, boosting the economic lifeblood, that leaves only government -- the third pillar of an economy -- to step in to provide jobs, in turn providing income to workers, who then use that income to buy food, clothing and shelter. Or, succinctly put, your spending is my income, and my spending is another's income. And so the flow goes on, irrigating the economic field and encouraging growth and health.
  But if government also follows the austerity path, even more workers lose their income, which means fewer purchases and lower sales of necessities as well as luxury goods.
   
   So is austerity the answer when hard times hit? For an individual person or a family household, or for a single firm, yes, as long as other workers and companies continue to contribute to the money flow.
   But when government refuses to contribute to the money flow, often through such investments as public works construction of roads and bridges, for example, thus putting people to work so they have money to spend, this can only diminish the money flow, and everyone suffers.
   Worse, when government not only practices austerity itself but also insists that others do the same, the cycle drags everyone down in a depressing economy.

   But a balanced budget is important, and staying within that budget is important, you say. And this is true, especially for individuals, households and single companies.
   It's also true, however, that individuals go into debt to invest in education to increase their skills, and companies go into debt to invest in more production capacity. Likewise, a government can  and should go into debt to provide jobs and income to increase the efficiency of the national system and enable companies and their workers to prosper.
   Then, when the national economy returns to health, government can and should step back, allowing the private sector to thrive on its own.
   
   The current question is whether government spending has crowded out private sector borrowing for production and expansion. One answer is that if the private sector is not producing and expanding, government can and should intervene.
   So far, it seems that the private sector is ready. Almost. However, government must be cautious as it withdraws. To do so precipitously may send the economy over the cliff -- again.