There are two camps out there in the economic world on ideas of how to get out of this recession. Krugman says that we have to keep spending more stimulus, throw the kitchen at it until the economy rebounds. The other camp talks about allowing deflation to occur, get all the excesses out of it, let it bleed until it reaches its new equilibrium and then the economy can have a fresh start to growing again. Both the camps focus on the fiscal and monetary policies of the economy without actually talking aboout the fundamentals of economic activity. As I have said before, money is just a proxy for economic activity and it can't be used to explain or correct everything about the economy. The economy is hinged on exchange of goods and services and an economy grows if this is exchange happens at a faster pace due to productivity increases.
By providing more stimulus, you could temporarily goose up the economy. Govt spending is never targeted at value-adding work but rather based on politically motivated allocations. no NPV valuation is done on govt spending and so it is unlikely that govt spending will give a sustainable boost to the economy - mostly it will be short-term boost. The other argument about letting the economy fall is not a good option either. Modern economy runs on optimism and entrepreneurship and you don't want to kill that spirit by going into serious deflation. The good option is somewhere in the middle of both Krugman and the deflationists. I will discuss the options out there more in my next blog.
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