Outlooks on an economic recovery from a policy POV
Disclaimer: sometimes it may sound like I know what I'm talking about, but I really don't. These are just my intuitions and a high flying analysis of what I hear from policy makers, pundits and economists on the state of the economy. At worst, I'm mostly going on a whim. I'm just a yobbo!
Here is a new article on Keynesianism dressing the table for us: http://online.wsj.com/article/SB123137373330762769.html#
The premises
The upcoming stimulus package is designed to step in for the consumer: we have been riding two bubbles in the past 20 years (tech and housing) and the consumer has been spending well above his capacity, exhibiting national negative savings rate at one point.
Hypothesis
Now that the consumer's wealth has been slashed severely, and that multiple lenders have gone bankrupt, the consumer will change his consumption pattern for several years to come, fundamentally altering the mechanics of the economy.
The dangers for policy makers
In the long run, such a change in consumer behavior could be for the better: his savings rate will be better, and he may have gain a healthy dose of caution. However, this could also mean that policies may become unaligned with reality: the bailouts and stimulus may try to recover levels that we grew accustomed to during the bubbles era while the background economic reality becomes disaligned with economic policy and measures. In other words, the effective economic reality is running below those now come to be expected growth curves. It is a dangerous case of wishful thinking. This, I repeat, is due to a fundamental change in consumer behavior. I believe that this is what leads economist Feldstein* to fear for the worst: that the economy may become dependent on the stimulus plan and once we remove the cash injections down the road, in 2 years or so, the consumer still won't be there to pick it up. This brings about the dangers of a swelling and continuing debt.
As is often stated, we are in uncharted territory. But the remedies that we bring to a patient whose disease we are unaccustomed with cannot be used willy-nilly, even though it can be tempting simply because actions must be taken.
Deficit
In particular, what will it mean to run such a large deficit? So far, the feeling I have gotten from pundits and experts is that we need to do something now and that we can cross the deficit bridge once we get there. Indeed, the stimulus package that should be announced in the weeks to come seem to make consensus amongst economists and policy makers. I fear that there is a general lack of care regarding the issue. I'd be interested in learning how big the forecasted deficit will be, how we plan to pay it off (the Bush tax cuts were suppose to pay for themselves through increased growth - it obviously hasn't turned out that way yet), and also how will the new expanding deficit compare historically.
We have a recent example in our last business cycle. In the 1990's, one of the government's top priority was debt reduction in the US, Canada, and Europe. Someone could thus maintain that our economies were emerging from the early 1990's recession where they had to spend a lot of money. However, there seems to be a consensus that this is not a regular boom - bust cycle.
Public works
Public works, even ignoring for a moment the potential for corruption and general money wasting that these tend to lead to, are also a dubious alternative. We are a mature economy. Roads need to be maintaned, but they cannot lead to the economic synergies that they do elsewhere or have done in the past: they do not have the investment value that they have say in Chain today or in the Hoover damn era. Infrastructure for our economy, by in large, must be viewed as a maintenance cost much more than as an investment venue. The job creation and stimulus effect is thus short term and punctual.
Solutions
The lesson from the past two years seem to be that we must refrain from the excesses that neo-liberalism has brought about and that a new direction must be taken. However, we must refrain from sinking into a socialist - keynesianist style policy making: you cannot buy yourself out of a recession.
The stimulus really are bailouts, much more like a bandaid than a fix. The synergetic and multiplying effects that money injunctions and public works have are limited at best. They must not be allowed to take center stage in our national discussion of economic reform.
What we need to do is take a few pages out of Global Political Economics, by Robert Gilpin, and go back to a more directed economy in the shape of a gradual yet modular economic plan for the next 5, 10 and 20 years. What we need is direction and fostering of certain sectors, in a moderate, conservative fashion.
The comeback to that is that governments can't pick winners and must let markets sort it out. That is true to a large extent and America is very good at applying those principles of market forces. That's the fundamentals, that's the canvas we can work with.
Yet there are obvious loosers that we can deal with: car makers for example. Once, Detroit was the subject of a strategic target. Now, it does not deserve it anymore because the economy has moved on to other focus points of economic drive and development. I believe that an "organized bankruptcy" and supporting temporarily the workers, as the Bush administration is doing right now, is the right way to go.
Also, there are also obvious winners: pharmaceuticals and medical research, and IT research. A greater investment fromt he government in those fields will be small in comparison to the bailouts plans yet it can trully bring about greater benefits for the economy in the years and decades to come.
A national economic plan with a focus on the long term also means reinvesting in education. Education standards in the US have fallen behind in the past years. It must redress if we are to keep our edge in creativity and enterprise.
We must not forget that the US faces fierce competition on the international stage and is starting to loose it's edge in cutting edge products and development. Developing an economic plan that focuses on just that will both be beneficial to the US economy and will foster the leadership of the US politically and economically internationally. Right now, a political economic plan is sorely lacking. Without that, we are chasing something that isn't anymore with stimulus and government direct money: the inflated economic levels of the bubbles era. The lack of a dynamic, forward looking economic plan also opens the door to yet another danger: protectionism.
The protectionist backlash
(...)
*The Charlie Rose show, 6th Jan 2009.
** There will, of course be bubbles again: I don't not mean to imply they can be fully eradicated. They seem to be tied to fundamental human traits like the "bandwagoning" behavior. Bandwagoning, however, usually works: a good idea catches on. Eventually, however, it can lead to ill effects (there is an over inflation of interest for that one thing). This could be yet another lesson on human rationality: our brains have developed cognitive adaptations (sometimes "hard wired", sometimes more cultural) that work wonderfully, but sometimes can be tricked into giving the "irrational" answer. All kinds of illusions are of this kind, or errors found in human judgement in the study of statistics for examaple.
