I was asked yesterday if the world will have to bear with another recession and frankly speaking I don't have a clear cut answer to it. One because I'm not an economic researcher paying with so many economic data to process it to give a correct answer and second because I still don't believe the recession is completely over. Yes, the situation in developing world is improving because the root cause of recession that is the existence of excess capacity is non existent there. But, in developed world they are still battling with excess capacity and pessimistic sentiments with govt. incentives acting as small lightening strikes in the dark. However, being an economics student familiar with economic history I do have an opinion on the situation.
There are two popular sayings;
" History Repeats Itself." and
" Wise men learn from mistake of others fools commit mistake of their own to learn."
If the US govt. doesn't learn from mistakes president Hoover made in 1929 then the first saying is all set to be true and the recession is not yet gone...... it is here to stay.
US slipped into slow down in August 1929 and Wall Street collapsed in October 1929 but, it took more than a year for economists and the then president Hoover to realize that depression had arrived into the real world from the books of economics. Till the time he took corrective steps it was very late and monetary policy was rendered useless and the worst phase of depression was seen with the banking holiday of March 1933.
Now look at the situation in 2011. The melt down started in 2007 however, in 2008 when Lehman Brothers asked for a bailout the then US treasury secretary refused and it was allowed to get bankrupt only to bailout so many institutions later due to the panic it triggered. It has been three years since Lehman went bankrupt and US economy was formally accepted to be slipping into recession. Yet the govt. seems to have no concrete policy in place for fighting out recession. Adding to the irony of situation is the fact that many economists want US govt. to let Fed control the situation when the 1929 depression not only proved that monetary policy is rendered useless in case of depression but, the dreadfulness of premature withdrawal of govt. stimulus was seen in aftermath of depression around 1937.
President Obama seems to be equally clueless as Hoover and it is exactly four years since the meltdown started. So what happened in 1933 can be repeated. Only if US continues its Hippocratic Capitalism where the capitalist want the govt. to spend money on bailing their big enterprises and offering them tax cut only so that they can pass it on to their executive in form of pay hikes and bonuses when the real economy remains stressed and the common man jobless. What they don't want is govt. spending directly to create jobs in economy and boost real demand because that for them is socialism. If that is socialism then that's US only way out. What President Roosevelt did in 1933 with his 'New Deal Policy' was a direct govt. intervention in the economy and no it was not socialist. It fought the US fight against the dreaded monster called 'Depression' and saved US capitalism from succumbing to death in clutches of Communism.
Thus, if US has to restore normalcy in economy it has to stop the quest to 'reinvent the wheel' and take the path already prepared by president Roosevelt guide to which is available in Keynsian model. Govt. has to supplement private spending till the time confidence is not restored in public and public confidence will not come from lowering prices and thereby increasing purchasing power or by increasing social security through unemployment benefit; it will come from a secured employment and that is what the govt. has to create in economy - employment through govt. spending.
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