I was listening to the excellent “This American Life” (iTunes Link) the other day. On the particular episode in question was a story produced by Alex Bloomberg who features on nne of the other podcasts produced by National Public Radio (NPR), the “Planet Money Podcast” (iTunes Link). The topic under discussion was the efficacy of the $1 trillion stimulus package proposed by the Obama government in the United States.
It seems that the stimulus package is based firmly in Keynesian economics. The main principle, according to the article of Keynesian economics, is that should public spending falter in an economy and business is unwilling or unable to fill the hole left by the reduction of available money in the system, then government should take over. It was Keynesian economics that by its advocates is credited with the end of the Depression in the 1930s. While it is true that Roosevelt spent government money on employment projects and public works he didn’t spend as much as urged to by Keynes until the outbreak of the Second World War. Detractors of this theory of economics say that it was actually the war spending, coupled with the fact that many people were employed in the armed forces and killed (hence reducing unemployment) that really ended the depression.
Classical economists are at odds with Keynesian economists. Classical economists believe that the only tool that should be wielded by governments is that of interest rates and that a free market economy will regulate itself. Keynes’ ideas fell out of favour in the 1960s and only reemerged recently. According to the podcast many politicians see Keynesian economics as a license to spend money. Classical economists fear that by placing countries into decefit in order to stimulate the economy more harm is done than good.
Paul Keating, former Australian Prime Minister and Treasurer, famously said at the beginning of the last decade of the twentieth century that the recesion Australia was experiencing was one that it had to have. He has been lambasted for that statement again and again, but now I begin to see the truth of it. Yes, the world is heading into recession and I am aware that we will face tough times with high unemployment and financial investments and markets collapsing with property prices fall, but this may not be a bad thing in the long term. Recessions bring prices back to what is reasonable. House prices become more affordable. The cost of household items are forced to fall as demand dwindles.
Stimulating the economy to keep these things artificially high is only going to increase the suffering. I believe that the classical economists are correct and that we should let recession take its course. Let the air out of the bubble and reduce the over stimulated demand of the past decade. It might hurt those who invested in property or the share market somewhat, well they enjoyed the boom and now they can suck it up like the rest of us.
Let the banks suffer. Yes, it is a complex situation but a good many banks are only planning to lend the money they receive. This is not the answer. People need to know that their investments are safe, not being risked again. If they have been mismanaged let them die. Demand will create a new world-order of banking.
Recently I likened economics to astrology and I still don’t believe that I am far off. It seems that the constant parade of “experts” wheeled out on the television making predictions based on the latest “data” are practicing nothing more than a form of haruspicy, the ancient art of reading the entrails of dead birds to predict the future.
