The Dark Realities of Economic Stimulus
Wednesday, September 15th, 2010
By Inya Ivkovic, MA for Profit Confidential
The economic stimuli, deployed by nearly every government around the world in response to the crash of 2008 and intended to prevent further deterioration of economic growth, are far from working. Governments have had lofty ideas on how to put their respective stimulus in action, but have mostly failed to achieve much on the ground floor level. Creating demand out of thin air is never easy, but, even historically speaking, governments have never been particularly good at it.
Economic stimulus is nothing more than a government’s redistribution of money that was either borrowed through selling its debt or collected through taxation of its citizens. Accumulating more debt and the deadweight of heightened taxation are poor ways to create demand. According to some prominent economists, the entire concept is absurd, although I have to wonder where these voices of reason were when trillions of dollars in stimulus money flooded the global financial systems last year.
As it has been the case so many times before, the crash of 2008 and the ensuing credit and financial crisis have been more about politics than finding valid economic solutions. Whenever the global markets become anxious and whenever the policymakers jump into the melee with promises of long-term solutions and guarantees that nothing similar would happen again, politicians are typically the first to the gate with brave words and seemingly such deeds, too. History again demonstrated that politicians, bankers or regulators are always more reactionary than proactive when dealing with systemic economic issues.
On the other hand, no politician, regardless of how progressive they are, can win an election on a platform of doom. And this is exactly what the U.S. economic and social structures are facing — the platform of doom. It is possible that, for the next two decades, just like Japan, the U.S. could be stuck with no to minimal economic growth, with high unemployment, with deteriorating living standards, with worsening housing affordability, etc. While this is the likely ugly truth, no politician is so suicidal as to actually say it publically and/or try to run a successful political campaign on such a dark premise.
Of course, it is true that governments and central banks have certain tools in their arsenal that can help influence negative economic events. The only problem is that those tools are limited and their power is routinely overestimated. The deep-rooted and long-term systemic problems in the current economic models cannot be fixed with Keynesian economics, no matter how “revitalized” it might be. Fighting financial issues with government deficit is not the answer in the 21st century.
At this point, no one really knows if all this stimuli (read = excess money supply and financial maneuvering) are going to create long-term growth. Unfortunately, it is more likely that global government action has made things worse in the long term, despite providing some short-term relief. Our reality is troublesome, without a doubt. Poor regulation of the past cannot be solved with heightened reactive new regulation. More debt cannot solve entrenched debt problems. The creation of artificial demand through government measures cannot jumpstart economic growth on its own.
It is clear now that the end of financial crisis of 2008 did not yield sustainable economic recovery. Largely due to the steps taken to fight it, the global economy now faces drawn-out stagnation, demand and supply imbalances, deteriorating sovereign and other credit woes, as well as the potential for more asset bubbles. Governments’ answer continues to be throwing more debt at the problem. Does anyone really think this is actually working?
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Tags: credit crisis, Economic growth, financial crisis, U.S. economy
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