Sunday, March 15, 2009

Notes on The Recession

We are technically an year into the economic crisis, with no end in sight. There have been big 'stimulus' on both sides of the Atlantic, and in the rest of the world, but the demand is still failing to pick up. There have been questions raised about stimulus all the time, and now more so, as the queue is forming for government money in all countries. Corporate America rather spectacularly and brazenly giving away the money they receive to stay afloat as bonuses to senior executives, further undermining the credibility of the bailout process. Besides, increasingly, the Obama administration is turning xenophobic and protectionist, to appease its voting crowd, and sending out precisely the wrong message for the time to the rest of the world.

It was almost amusing, but for the human pain, to watch monetarism's demise. This recession is the nail in the coffin of the flawed thinking of Reaganomics/ Thatcherism. The policy that the economy can be controlled simply by monetary measures, and the individual economic agents are the best judge and guardians of greater common good has been proved resoundingly wrong. The philosophy itself was, however, a reaction to the failure of the post-war Keynesian to control inflation and provide a stable society. So, the current wholesale back-to-Keynes philosophy, with Gordon Brown preaching this to the world with great British pride, is sort of a natural reaction, but would it ultimately provide a solution.

The premises are simple: every $1 spent by the government should generate $1.50 of economic activity, or demand. The famed multiplier should rescue us from the current quagmire, when no one seems to want to buy anything. So, the hope is that we shall quickly go back to the times we saw post 2001, when American consumers were spending and the Chinese were producing, and everyone was merry. So will Britain, with its legions of Real Estate speculators and bond traders, and the city of London will soon recover its charm.

There are, of course, those who believe that it will not be that easy. They argue that American consumers can not pull the world anymore, and the Chinese and the Indians must start to spend as well. Which is to say that the global demand must be more broadbased, with more people participating in the consumption.

So far, the stimulus were national stimulus - spent on national economies. Americans had most money and creditworthiness, so they were spending the maximum. But they are already seeing the limits they can go up to, and that without a lift-off of global demand, they are not going to get the results they desire. So this Bangalore Engineer who has now put off his marriage and plans to buy a car by a year because of the recession in America needs to be told that America depends on his marriage and car purchase to recover. Funny how things work!

Gordon Brown recently hosted G20 leaders to tell them to do more - to spend more money on their economy to get the demand back on track. Not everyone is convinced - Angela Markel sounded like a CEO when she said she needs to see the bailout packages working first - and it may be a very bad idea for some of the countries like India, which is already deep into debt, to try to spend its way out of trouble.

This is why we need some new thinking. This back to Keynes is a knee-jerk failure of imagination, trying to limit ourselves to tried-and-tested [and proven to fail] methods rather than asking ourselves questions why it happened. For example, the failure in demand has a clear link to the rise in inequality, the exclusion of a large section of the population, in America and globally, from the prosperity. This is also because of the divergence of the 'financial' world from the 'real' world - as always happens when a cycle of civilization comes to an end and myths overpower the reality - and the belief that the mathematical models and Wall Street Journal can decipher and dictate human behaviour across the world.

However, if history is any guide, at times like this, history is forgotten. We know protectionism makes a bad situation worse, but we go back there. We create a more unequal society by trying to prop up fat cats and robbing the taxpayers. We create a greater financial bubble by borrowing beyond our means, at the national level, and becoming sub-prime countries ourselves. And, finally, when all else fails, we pick up a fight - an war somewhere - and blame aliens for our woes. I thought this recession will be short-lived and shallow, but will result in a greater calamity in a few years; however, as things stand now, we are quickly going down and there will not be much left to save unless some bold and imaginative actions are not taken very very soon.

No comments:

Popular Posts

How To Live

"Far better it is to dare mighty things, to win glorious triumphs even though checkered by failure, than to rank with those poor spirits who neither enjoy nor suffer much because they live in the grey twilight that knows neither victory nor defeat."

- Theodore Roosevelt

Last Words

We shall not cease from exploration
And the end of all our exploring
Will be to arrive where we started
And know the place for the first time.

- T S Eliot

Creative Commons License

AddThis