Thursday, February 19, 2009

Barking up the wrong Keynes

In almost all discussions on economics in the past year the name of John Maynard Keynes has been invoked. The shadow of Keynes writ large over the global economic landscape because his thesis, that the Great Depression could be arrested and, reversed by active fiscal policies by governments, was proven to be effective.

It was pointed out to me recently over a late night cuppa session by a highly knowledgeable economist (an authentic, practising economist, mind you) that many of us are unaware or, have forgotten the historical context of Keynes' General Theory which, in large part, was motivated by Keynes' desire to debunk the Marxist view that the Great Depression signalled the imminent death of Capitalism (with a big "C").

The context of the current economic turmoil is quite different from the Great Depression. But, I won't bore you with the details.

Suffice to say that policy makers and the worried public needs to be very, very clear that any economic stimulus will need to address short-term economic issues and long-term structural issues.

Short-term issues
It is always tempting and, inevitable, that economic stimulus packages will be directed at current ailments. These short-term policies will involve all sorts of spending. Roads, rails, bridges, schools and assorted infrastructure will be showered with funds. But, be warned, the tendering out of these jobs should at all times be open and transparent. Otherwise, there may be negative perceptions.

This form of spending stimulus may also be regarded as trickle-down policies since money goes to specific parties involved in that activity and their suppliers. Whether the broader economy benefits is moot.

That is why many people are, correctly, suggesting that spending be directed towards Malaysia's pathetic public transportation system. An inefficient public transportation is an economic cost because of time wasted in waiting for buses, trains and taxis. Or, time wasted in traffic jams.

And, then, there are tax cuts, fresh investment incentives, lower costs of borrowing and other revenue and monetary policies.

Bear in mind, though, that fiscal spending can only provide some cushion-effect. We will all be falling down and hurting ourselves. The challenge is to minimise the economic and financial injuries.

Long-term and structural issues
Less obvious but, more important, are components of the economic stimulus package that are directed to longer term and structural issues. What are these?

These are issues involving education, productivity, skills, values, creativity and innovativeness. I have written extensively on these points in earlier posts. These will be re-visited in due course.

Barking up the wrong Keynes
Stimulus spending are being characterised as Keynesian solutions. That may not be accurate. It may actually be a wrong characterisation.

To use a pyrotechnical metaphor, in a chemical fire, spraying water is not likely to douse the flame. Thus, economic stimulus packages provide a necessary cushion to attempt to soften the blow of the economic turmoil. However, it is never a complete panacea.


bangkai said...

I'm learning something new here.


de minimis said...

Any time, bro.