Sunday, April 26, 2009

Spending the way out of crisis

Olivier Blanchard, IMF chief economist, was interviewed by Kerry O'Brien a few days ago.

The chief issue was economic stimulation. If you accept this standard Keynesian approach to recession (and most do, in an orthodox economics context), then the question becomes simply one of where to direct the government spend, so as to provide the best targetted stimulation.

The old argument was that the most immediate stimulation comes from giving it directly to people. Infrastructure spends just circulate the money too slowly; quicker stimulation is needed.

But recently, we've seen people around the world have been saving rather than spending their government stimulation. In times of uncertain employment, this is quite understandable (governments just wish people would spend when told to, and save when told to!). The old tory chestnut, stimulation via tax cuts was quickly dismissed by Blanchard (even less useful than direct stimulation payments).

Blanchard's best suggestion was bringing forward existing infrastructure plans by several years. In effect, the indirect stimulation would shore up jobs, which would help most in restoring consumer (ie spender) confidence.

In fact, there is a far more obvious solution than any of those, if the aim is to start circulating money as quickly as possible. Simply give it to the most disadvantaged people: unemployed, underemployed, pensioners, etc. Those that have fewest resources will be most likely to spend quickly - on the necessities of life.

If that's enough to give a government the willies, another option is to channel such largesse through welfare and charitable agencies.

Blanchard was also expressing confidence in the current situation: although global recession had a way to go, he could see the light at the end of the tunnel. When asked if he'd be smiling at the situation in a month or two, he said he was smiling already. (I note, however, it is always hard to tell how accurate a picture is being painted by anyone in authority at times like this. Given economic confidence is the biggest issue, they would naturally exude as much confidence as possible.)

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