Sunday, January 11, 2009

The 'Trick' to save the Economy.

Keynesian economics ,was a model that many believe brought United States and the world out of the Great Depression. During the Great Depression of 1929, unemployment was at a peak, markets faced a recession and the morale was terribly low. Experts viewed the Great Depression as moral punishment for evil over-spenders , and as lesson economics taught to these spenders advising them to increase their savings. As often is the case with bad economic times, people thought they had to save the money for the future , after nature had befallen them with the depression.
Consumers stopped spending and they started saving money. Retailers stopped buying goods. Industries reduced manufacturing of these goods causing a further reduction of jobs. Keynes realised that a recession was caused by excess saving, which drove down demand , caused unemployment and landed the economy into a downward spiral. Keynes believed that government action could end this cascade effect and stop the over-saving attitude of people. He suggested that governments should pay people to dig ditches and then fill them up again. This would put money into the pockets of people, and that was the aim of the exercise.
It is interesting to note that his suggestion had several messages. One, that the government had to create jobs. Jobs that will enable people to earn, and enable them start spending. Two, the jobs created need not add any value by the nature of the jobs themselves. Keynes' idea of asking to pay people to dig ditches and then fill them up again, was clearly the idea of creating jobs , that required minimal investment , required minimum skill and were of minimal value to the Government. The World War II , provided ample opportunity to exercise this trick. I should say USA was fortunate to have had gotten into the war. The military economy created a lot of jobs. Most jobs did not add any value to US from the point of view of industrial economy. (although the war created for USA a huge political advantage since they won.)But the war created earnings and hence consumption. The real victory for USA may not have been the victory in the political sphere but the victory in the war against recession. They had established themselves as the political superpower alright. But more importantly they had won to become the economic superpower.
The world is in a recession again. People are reducing the spending again. Companies are reducing expenditure, cutting costs and laying off people. The role of the Indian Government for the next 4-5 years is going to be a crucial one. The government will have to create an atmosphere of spending. Investing heavily in infrastructure will create jobs alright. But that alone wont do. With elections round the corner, we may have to rethink our priorities in the given scenario. We need to see what can do the trick for India.
A little after the Great depression began, in 1932 ,President Roosevelt made created huge investments in infrastructure. He got several roadways, highways and electric stations sanctioned from his budget. He created jobs. But he could not kill the depression. The financial weakness of the economy prevented his idea from remaining sustainable. His wonderful idea failed. Luckily World War II came to his rescue and the military economy saved the day.
For a long time now, our finance ministers have been speaking about the basic financial strength of our economy. Hence, I am led to believe that , even in the wake of this cash crunch, the money is not all lost. It remains trapped with governmental and private firms as savings for the bad day. (or as bundles of black money! or both ). These firms need to be triggered to start spending the money. Public- Private consortiums may do the job. But, we have to find our own 'Keynes' trick for this scenario. I believe that we need to increase our spending in three important areas.
1. Infrastructure: More investments needs to flow into roads, metro rails, airports, harbours, 3G,etc.
2. Nuclear energy: Government should invite private players to start manufacturing nuclear energy efficiently and figure models of distribution.
3. Anti-Terrorism: Government needs to spend heavily in intelligence, NSG, Police system etc.
These measures are needed. They are needed now and as soon as possible. We need to really ask ourselves, which Government if elected can do the 'trick'. A 'trick' that can save the economy.

2 comments:

Bullsight said...

will Man Mohan and people of India hear your voice?? good luck to upcoming finance minister...

Sita said...

Good thinking!
Hope our finance minister reads this and takes some actions soon!!