Present times, its become a common phenomena for every government, irrespective of its ideological slant, to get committed to sparking a stimulus. Nothing illustrates this better than the breathtaking rediscovery of John Maynard Keynes' body of work in economics by governments and government-sponsored economists. And, as Milton Friedman, the high priest of neoliberal economics, said in 1965, "We are all Keynesian's now." Its time to sing the song again. Keynes' work, laid the ground for a concerted effort by governments across the world to save capitalism from its own excesses. More specifically, it contained prescriptions for governments to lay the basis for a sustained economic revival. Government spending, Keynes famously argued, that this Government spending has a multiplier effect on the economy. A bout of spending in round one, by translating into the expansion of incomes, consumption and investments has a cascading effect, resulting in a further boost to incomes in round two. Simply put, a rupee spent now, will cause incomes to expand by a multiple of one rupee.
Any stimulus package is also critically dependent on the import intensity of an economy. Other things remaining the same, an economy with a greater import intensity is likely to experience a larger "leakage" across its borders. This is because a part of the stimulus will be used to import goods and services resulting in benefits from the package being leaked outside the country.
Is this going to come back to haunt us in the future?
The impact of countries to engage in protectionism seen in this context (this is not the only reason why countries indulge in protectionism) is what is running in the minds of all the economists and analysts around the world. However the increasing Protectionism and Government spending produces an expansion in output, an expansion in consumption, However it also has a significant deterioration effect on the trade balance and the real exchange rate. [1] [2]
The Keynes multiplier effect can be has been constantly debated by the monetarists big and large, However the enormous Government Spendings, bailouts and other stimulus packages certainly mean higher tax rates in the times to come. It certainly is a thin line of ice on which we are playing these games.
It is clear, that just as the world is going round and round, these economic activities are going in circles too. However, constantly the economies are shrinking or expanding. Thus instead of just moving in circles, there is a tangential effect from the pull or push from the economies resulting in a spiral movement. Tragically most of the economies the world over, are currently shrinking and due to the inner pull, we are being sucked deep in the spiral. All the major powers are trying to find an equilibrium on this rotating spiral..
Well, jokingly one of my good friends [3] says, it is all 'maya ' and best thing to do is to come out of the spiral, get detached from these economic forces and to get back to spirituality.. In fact, this humor from him is what motivated me to write this piece.
Well, the solution to the economic crisis, being currently signaled to be 'over' definitely does not lie in just government spending and saying 'Buy American!' and 'Only Americans in Jobs' alone.
References:
[3] Nishith Parashar, My classmate at EDM in XLRI, Singapore.
