Economics has once again come to contribute to the sustainability of political regimes' merriment. Adam Smith largely argued for the efficiency of 'invisible hand' that constrained the profligate spending hands of the political regimes. So, Marx helped plant the seeds of political regimes that would merrily spend poor people's hard earned money. But the liberals and democrats had difficulty in adopting that model, leaving Marx to be picked up by the politicians in Russia first and variants of their model proliferate in poor State-dictated economies in Asia as the colonial rulers evacuated in the twentieth century. But the western capitalist economies of richer nations still had mental blocks to accept the principle of explicit politician-ruled economic systems. At the beginning of the Great Depression of the 1930s Roosevelt found it difficult to adopt Keynes' suggestion for and defense of large State-spending (even for digging holes in the earth and filling them up) to get out of the economic mess. The politicians in capitalist Europe and the United States searched for alternative models of enjoying unlimited spending power. Samuelson's synthesis models helped create an avenue for steady growth of public expenditure supervised by politicians and provided Government's Budget a central place in the economic system. This together with the opportunity to commercialize military technology and equipment and extend tied foreign aid to the war-ravaged and the third world countries helped political regimes in capitalist economies to expand their legitimate empire of spending profligacy. Capitalist economy governments soon became the overwhelmingly dominant consumer or supplier in many markets both in the real and the financial sectors.
Friedman's logic of keeping governments out from most markets and economic activities did become popular among the people at large but failed to affect the popular addiction to complete faith and dependence on money gobbling political governments: irrespective of what the ultimate outcome would be, Governments, like mothers, were expected to do anything that was required to ensure that the children of God get continuously improving supply of employment, income, goods and services. This concept of economic freedom, rather freedom from economic worries pervaded the developed, capitalist economy democracies as much as it enchants the developing and the communist world. Since no political animal succeded in finding as yet the magic wand of ensuring sustained freedom from economic worries, people would continue to struggle under economic hardships and uncertainty in the hope of the success of the Savior - the political lords of the State.
Keynes- Samuelson Rescue
The Great Recession that began in 2008 seems to be getting over, although pessimists still expect a 'double-dip recession' to witness its second dip soon, raising hopes in the minds of the Marxist faith sadly disappointed over seemingly yet another surprise capitalist recovery from the brinks of a great collapse to extinction. But the political regimes are enjoying the great surge in their spending power. First, the US ran through great budget/ fiscal deficits since the beginning of the new century and encouraging and prodding the financial sector to fall into the trap of childish imprudence to support the political dream of home-ownership to all - irrespective of the varying economics of individual investment in house-ownership, by encouraging unsustainable leveraging. The artificial housing mortgage boom sucked in resources from everywhere creating employment and income as well as larger tax revenues (that could be wasted in profligate political spending. The inevitable burst of the boom caused a great financial sector crisis around the World, accentuating the normal recessionary phase of capitalistic trade cycle into the likes of the frightening Great Depression of the 1930s.
Fed Chairman Ben Shalom Bernanke with his in depth of study of the Great Depression led the US politicians to accept the so-called bail-outs and stimulus packages: with great drama over the compensation of greedy and self-paid financial sector bosses, the politicians sitting in opposite beaches took away huge sums of public money for exercising their spending freedom. This was copied by all Governments throughout the World from Europe to Asia including the right-handed globalizing left-handed communist China. For the third country politicians including India this was a great opportunity of using profligate spending power: the businessmen were happy with lower interest rates, easy liquidity (now called, quantitative easing) and bursting government spending to support consumer demand, while the common people thanked government action to save employment (even as unemployment percentage doubled in less than 12 months in the US). The Keynesian economists were happy that the entire world was at last now listening to Keynes advice made eight decades ago and Samuelson could see his multiplier-accelerator model at work world-wide before he passed away.
Awaiting Acceleration in Revival
But when will the accelerator part of the model become strong enough to allow governments to rewind stimulus and the economy will still be growing after absorbing the negative multiplier effect of lowering or withdrawal of stimulus? No one is certain yet. So, politicians can continue with their profligacy: spend to invite problem, spend more to attack problem and spend till the current problem gets solved and in the process a new problem emerges, and spend all the more again when the new inflation problem replaces the old recession problem. Government expenditure must continuously grow to satisfy the politicians appetite to spend. Every time, economics will come to justify larger spending power to political regimes. So, the US stimulus package in 2010 will be larger than that in 2009. India would be spending more. US inflation rate is still low, but India is facing a sharp rise in inflation.
Spend to curb future Inflation
When will the inflation problem emerge? US inflation rate is still low, but India is facing a sharp rise in inflation. The economists have an answer to deal with inflation as well. Reduce budget deficit, liberalize imports and expand capacity to match demand growth. The economists of the left handed variety are already worried about huge budget/ fiscal deficit in the US, other developed countries and countries like India (no one has clear idea of how budget deficit may be estimated somewhat correctly for China)and the consequential resurgence of inflation the apprehend. They will continue to raise progressively louder alarms if the governments do not rein in budget deficits and protect the weak and the middle classes from the deleterious impact of rising prices. So, Governments will, sooner or later, raise taxes on the rich and continue to spend vigorously to protect the non-rich notwithstanding the right-handed economists' opposition of profligate wasteful public expenditure (governments round the world have developed an unassailable reputation of using of pubic money in the most inefficient manner). The businessmen will reluctantly absorb the taxes waiting for prices to rise further to retain commercially viability and attractiveness of their enterprises.
When will inflation rise and taxes be raised? Some Keynesian economics would not call for raising taxes till capacity seems to be on the verge of falling short of demand. So this measure could wait for a while in most countries before optimism about economic expansion returns. Meanwhile, if food prices continue to rise following world-wide crop-shortfalls and food shortages, what will the politicians do? Politicians know the art of managing the citizens' outburst by diverting attention to some other problems - there are many of these available: global warming, terrorism, religious and other social conflicts: one government may be replaced by another government to satisfy citizens if they so desired.
US Recovery Signs Spread Optimism!
The United States seems to be on the path of recovering from the bottom. With greater stimulus spend in 2010, unemployment may not reach 11 % and soon start falling, even if at a very slow rate over the next Nina / ten months. Thanks Giving and Christmas sales are estimated to have been better in 2009 than in 2008. Households had deferred purchases following the rapid growth of unemployment following the fall of the Lehman Brothers and saved more of their incomes preparing for anticipated job loss. Those who could retain their jobs (90% did) have started releasing their pent-up demand for goods. Private sector investment may take some more time to pick up and unutilised capacity still remains high even if the inventories have gone down.
So, let us assume that the Great Recession has bottomed out in the US and with little or more time lag the Great Recession will soon be a past throghout the World. Inflation will be managed as it develops with the recovery gathering momentum and the different economies entering the expansion phase in another 13 to 20 months. Yet, the World economy will still be back to square one: the major international economic imbalance that excerbated the normal capitalistic recession into a Great Recession through the medium of a severe financial sector meltdown, still remains.
Back to Square One: Unsustainable Trade Balances
The adverse impact of the financial meltdown has been attended to successfully: maybe the politicians will, for a while, dare lure financial institution chief executives in to imprudent behavior as they did in the US during 2002- 2005, prodding the mortgage refinanciers, commercial banks, investment banks, insurance companies and the regulators with a implicit State comfort that nothing could get wrong so that these institutions suck in domestic and foreign debt money without adequate equity back-up. This may not be repeated. But so long as the basic economic imbalance in international trade continues, this will create pressure to generate new avenues to seed the next financial disaster. The sustained favourable trade surplus of a poor country like China selling goods cheaper to the Western capitalist economies to keep employment in China high through low\ low wage rates relative to productivity and administered, under-valued exchange rate of Chinese yuan, will germinate seeds of next disaster. So will the continuation of huge current and trade account deficit to keep inflation low even as unskilled labor there becomes worse off as Samuelson's theorem had predicted.
Yes, China may suddenly find interest in incraesing gold production and gold holdings rather tha investing mostly in US treasury bills or the Euro, and cause gold prices to continuosly rise sharply as they have been in the recent past.as other emerging countries try buing into gold. Yes, this may benefit the US as well since it has the largest stock of gold reserves whose value would be rising. But, just as the US home prices could not rise indefinitely and had to cause a finacial crash, the movement of gold prices will have its own effect in the currency and precoius metal markets with speculators searching for opportunity to book profits at some time or the other. As China's foreign investments rush in to mining properties and agricutural lands in African, Latin American and other poorer third world countries, the currency markets will be impacted. Currency markets are ultimately an integral part of the financial markets. There is always the apprehension that the huge stimulus spending of the Chinese political regime, using their banks may have considerably hurt their financial health to make it riskier to transact business with them
Economics Aid for the Future
Economists do not as yet seem to have a reasonably acceptable model to capture all this ramifications of imbalance in international trading accounts of nations and recommend to politicians policies that are as convincing as those of the Keynes and those that are derived from Samuelson's multiplier-accelerator models. Will economists find something soon? They have the Hecksher-Ohlin Model framework and the related analyses on international trade. How would thse be developed further and extended to be relevant and useful to the politicians across the World to initiate co-ordinated action without much bickering as they did to avoid protectionism, following Adam Smith and embark on huge stimulus packages, following Keynes in 2009? Maybe extensions of Hecksher-Ohlin models will not be easily accepted by the third world country politicians. Maybe economists will need also to model, for politicians to understand, the inter-realtions of the international markets for precious metals, rapidly-dwindling other industrial metals, currency and currency derivatives, financial markets and the newer markets for trade in the existing and emerging technologies of containing global warming and carbon emmisions as well as water conservation, and solid waste recycling.
Maybe China, India and other fast developing emerging economies will agree to find ways to sustain growth while reducing their claims on exhastible natuural resources and polluting the global climate in favour of the poorest nations in Africa and parts of Asia. All these may need to be incorporated in open economy economic growth models that economists would be developing now. Economics has to extend aid to political regimes to spend public money inefficiently and wastefully, and yet keep the citizens continually addicted to their faith on politicians as the Saviors once again when the next Great Recession occurs out of the still persisting international trade imbalace. Maybe some economists are just about completing their inquiry into the political policy requirements for the Stability of Growing Wealth of Golbalised Nations.
