Saturday, January 10, 2009

The great debate on what is best to stimulate the economy

There is considerable input from all quarters on what is needed to avoid a catastrophic recession or even a depression. The opinions are as diverse as the number of advisors. If one goes back to basics, one can find the solution that works, not being tainted with labels for the economic theories propounded. What is needed is an amalgamation of right and left leaning theories into one that actually works. This is not a capitalist socialist thing either, as China is suffering as much as the US. The out of work Chinese have to go back to their home villages, giving up their yuppy lifestyle.

So how do we use existing productive capacity to good use that will immediately stimulate the economy? There is both the supply side and the demand side to contend with and so there is no use manufacturing cars with the existing productive capacity if there is no one to buy them.

It has been said that the US boom was fuelled by the increase in consumer spending which came out of increased confidence, job security, increased income, and increase in wealth from increasing home values and stock values. People then felt wealthier and so did not hesitate on borrowing on credit cards and home equity lines to spend on cars, second homes, flat screen TVs and exotic vacations. Now all these are in reverse and hence the contraction in every area of demand leading to unemployment.

Companies cannot afford to lose money even though the government can and so the layoffs are in the private sector while those in government jobs are secure for the time being. It is therefore very sad that the risk taking entrepreneur and his hard working employees lose their jobs through no fault of their own, many of them gearing up their business to meet demand which has suddenly dried up unexpectedly almost like a tornado.

It is for this economic tornado, just like for the real thing, that low interest federal money must be given. How it is to be equitably distributed is the question. When it is distributed will it have the impact bearing in mind the changed circumstances. This is the unknown. If I am a business man and I have laid off or about to lay off workers when I see a fall in demand for my products, will the $5,000 or whatever figure is given to me, prevent a layoff or encourage me to hire? That is the $64,000 question. In essence we must find the fix that will immediately have an effect in boosting demand and therefore reduce the need to layoff to put it simply.
There is a natural reticence to spend when one is out of a job, or about to lose one. Even if one has savings, one is less likely to spend fearing the length of the layoff. So unwittingly economics turns to psychology of confidence as the only practical solution. No matter how much tax rebates I receive, I will not go and spend it. I may spend a little of it, but for the bailout money to be effective I must spend all of it. Then should I spend it on imported goods or goods produced at home. That is not something that I could be compelled to do and is just a personal choice depending on what is available in the market along with the price and quality as I see it, along with my sense of patriotism. All these cannot be measured in figures.

It is therefore important that obstacles to confidence boosts such as the Gaza crisis are resolved so the economic crisis can be short lived. One cannot wait to resolve the economic crisis before the Israel problem is resolved, or shall we call the Palestinian problem is the US media have there say. There in lies the nub because the US just does not see the gravity of the Middle East crisis as emanating from the need for a few million Israelis insisting on living amongst a permanently hostile Arab neighborhood, supported exclusively by US aid and arms supplies to brutally suppress all who attack their land.

A holistic approach to the world is therefore needed, as all the large economies, of US, China, Russia, India, Japan, EU and Brazil are in crisis due to the intertwined and interdependant relationships they have with each other. We cannot go back to isolationism, which is now advocated by many, so this issue does not arise. I say it will, if we let greed get the better of common sense. It does not matter what ism we subscribe to.

The root causes of the current recession can take its time to be debated, and we should fix the current crisis as soon as possible before we sink to an even lower level of confidence in the future, when the worst of human qualities will be set free to add death and destruction to the already troubled psyche.

In a novel approach if the government was efficient, I would make the government the spender of last resort buying consumer goods and capital goods and then giving it to the users with some kind of interest free IOU rather than give money which will end up in a savings account, or used to draw down debt and pay of liabilities and credit cards. The effective way of doing this is giving people low interest credit if they purchase from a range of items that will be specifically identified as being the quickest to stimulate employment!!! So if I buy a car the government through the banks will lend!

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